Linking Theory + Practice: CEO Selection

Selecting a New Leader: Data Nuggets vs. Data Noise

A complaint we hear often from boards is that the volume of data received from HR comes without a clear sense of the few salient datapoints that should have the greatest impact on strategy-setting and policymaking. Executives are increasingly presented with massive amounts of data intended to help them make better decisions, but often it becomes difficult to identify the signal among the noise. This is especially critical when looking for talent-related information that yields insights for promotion and succession decisions. In this installment of Linking Theory + Practice, we identify a short list of data nuggets to consider when evaluating and selecting a new leader, including a new chief executive officer.

Picking the right CEO successor is among the most important remits for a board. But it is a daunting task, largely because getting it wrong exacts such a steep price. In the S&P 1500 alone, companies lose nearly $1 trillion a year in market value thanks to botched C-suite transitions.¹ Their reputations suffer, as do customer confidence, employee engagement and productivity. The stakes are indisputably high

Not only are boards, CEOs and their executive HR partners drowning in data generally, but they are specifically awash with leadership data—psychometrics, performance reviews, development assessments, 360-degree feedback—and struggling to parse it all. In addition, inherent biases can inevitably cloud their judgment. In most succession-planning lists, there are assumed heirs apparent within the organization. Often, these candidates seem to have impressive career trajectories in their companies along with oft-cited interpersonal qualities such as “gravitas” and “charisma.” More to the point, they are known entities to the board. But do these characteristics translate to CEO performance and impact? As directors and executives search for leaders who can influence diverse groups of followers and deliver results in an era of stakeholder capitalism, where can they look for indicators that help predict success? What metrics really matter?

It is clear that the highest performing chief executives—those who consistently meet or exceed boards', investors' and other stakeholders' expectations—often don't fit the pervasive "ideal CEO" stereotype. That realization led to The CEO Genome Project,² a 10-year study by leadership advisory firm ghSMART to sort out the attributes most closely associated with strong performance. Partnering with academics at the University of Chicago and Copenhagen Business Schools and with analysts at the SAS Institute, data was mined from approximately 17,000 assessments of C-suite executives (including 2,000 CEOs) and from more than 100 in-depth interviews. Based on patterns in leadership behavior and style, career history and business results, four critical attributes were identified. Assessing for these qualities separates the leaders who have the biggest impact on business results from those we typically choose from "central casting."

In this article, we’ll describe the types of questions and data that reveal those who have these attributes. We’ll also discuss how boards can collaborate with HR to measure candidates’ potential for success in the CEO role. Boards members often find themselves in an untenable situation after their CEO has undermined public trust, mismanaged a crisis or simply made a series of bad decisions. They can avoid many of these problems to begin with by accurately identifying the succession candidates best equipped to succeed in the top job. Focusing on these four attributes can make that task much more manageable. 

Decisiveness

Of the many CEO criteria boards assess, they rarely take a close look at decisiveness, one of the most telling indicators at their disposal. 

Decisiveness isn’t about making perfect decisions with absolute confidence. Often speed matters even more than accuracy. Leaders who get picked for the top job and excel once they’re hired are 12 times more likely than others to have demonstrated an ability to make decisions without having all the information they’d ideally like to have at their fingertips. Of course, you don’t want to choose someone who has made a lot of bad calls over the long term. But you also don’t want a CEO who gets caught up in deliberation as the world passes by. 

Being fast doesn’t mean being hasty. It means having a decision process or formula that prevents paralysis—one that incorporates input from diverse sources, including contrarian perspectives. You’re looking for candidates who can make sound decisions quickly because they have a system for gathering and weighing multiple points of view.

Decisive leaders make a number of daily decisions that reflect the amount and types of risk they want to take. They don’t take shortcuts or just use their gut. They have a process for decision-making that doesn’t bog them down. Rather, their processes should allow them to make decisions quickly, lest they become overwhelmed and paralyzed by market movements. Ideally, they’ve already thought carefully about their inputs, their risk appetite, and so on—and they generally stay within that band when making decisions. Based on results, they continually refine their process. 

How to measure it:

One way to evaluate decision speed is to have others in the organization rate the leader’s skill in this area. One global pharmaceutical company does this as part of its annual 360-degree assessment of all leaders in the top two levels of the company. Direct reports and peers are asked to rate each leader in their work group on several dimensions, including that person’s ability to move ahead with decisions without revisiting them unless circumstances change and to make decisions even when not all the desired information is available. The questions are meant to gauge progress in the face of uncertainty. 

Another useful metric for decisiveness is the leader’s hit rate: In aggregate, how many decisions were taken and how many have yielded positive results? You are, of course, partly measuring accuracy here, but decision quantity and speed are also critical components because you have to take the hits to score. 

Adaptability

The second indicator of CEO potential is adaptability, which includes both business adaptability and personal adaptability. 

Business adaptability speaks to the complexity of challenges the leader has navigated in the roles they occupied. It is not enough to traverse a number of roles and functions (many executives rotating through 2-3 years in each role). You have to look at the positive changes the leader has made to help the business thrive in a competitive market. Leaders who have effectively managed different kinds of change in various areas of the business will be better equipped than those who have stayed in one place to deal with ambiguity and uncertainty across the business and in the marketplace.

Personal adaptability is about the mix of challenges leaders have tackled within their roles and their lives, whether they’ve been receptive to critical feedback and grown over time because of it, and whether they’ve cleared obstacles and rebounded from failures effectively. Our data analysis suggests that leaders who are personally adaptable also tend to be adaptable when running a business. 

For example, one high-tech CEO described how her difficult childhood has shaped her as a leader. Her father was a mortgage broker, and her mother was a realtor, and so the mid-1980s housing market crash was financially devastating to her family. “I was 12 when it happened,” she said. “There was the constant moving and getting evicted [and] occasionally not having enough to eat.” She saw firsthand how much damage could be done by forces out of her control. Now, she is very driven “to ensure my family will never have to endure what I did.” She is similarly driven to lead her company into a sustainable future—no small feat in the tech industry, where the landscape is constantly changing. She is delivering strong results, and those who work with and for her describe her as smart, intense and caring. 

In short, adaptability requires resilience and resourcefulness, which candidates can demonstrate both in business and in life. It doesn’t entail being all things to all people, or flip-flopping, or turning on a dime. It involves having the capacity for foresight, growth and measured risk taking. High adaptability is closely associated with “future-proofing” skills—the ability to think creatively about where the business is headed while working on today’s P&L.

How to measure it:

Demonstrated ability to navigate change and deal with ambiguity can certainly show up in a resume which will identify the number of career pivots to different roles, units or locations. Questions about adaptability include: How many times have candidates ventured into the unknown or changed direction when it wasn’t easy to do so? Have they led a risky turnaround? Started a new office? Launched a new service line? Did they incubate a product idea because they could see a competitive threat on the horizon? Did they have the courage to pull the plug on an initiative that wasn’t working? How have they managed crucible moments, like leading a unit through digital transformation or managing supply-chain problems during the pandemic?

However, if you want to create a more diverse succession pool, you’ll need to dig deeper than what is on their resumes, which do not reflect the full potential of candidates from groups that aren’t equitably represented in senior management positions. To gauge how open candidates are to feedback and change, for example, comb through the past five years of performance reviews. After mastering new skills, have they taken on new goals and challenges for personal and professional growth? Or conversely, have recurring problems of being hotheaded or struggling to collaborate cropped up again and again? 

To reveal future-proofing ability, do some informal network mapping. Internally, who do they collaborate with most? Who are their mentors and who are they mentoring? How well connected are they across functional and divisional boundaries? Externally, what boards do they sit on? What peer or industry groups do they belong to? When they go to events, are they networking with people outside their industry so they can discover fresh ideas? Do they tap unusual resources to gain new insights about external stakeholders? Answers to these questions provide information about a leader’s ability to make unexpected connections and create an original vision for the future.  

Engagement and Inclusion

Another indicator of CEO potential is how effectively leaders can influence a broad, diverse set of stakeholders. This is different from being liked or popular. This is about creating followership that yields results. Our analysis suggests that leaders who do this best demonstrate two key skills: engaging people through purpose and impact, and leading them equitably and inclusively. 

In addition, engaging leaders should have a clear answer to the question, “Why should anyone be led by you?”³ They must have a compelling value proposition—for example, “I’m relentlessly tough, but the work we do together matters, and you can always count on me to be fair and have your back.” 

How to measure it:

It’s standard practice for HR departments to conduct engagement surveys to find out how direct reports feel about their work and what effect their manager has on their mindset and motivation. In addition to mining these results, you should ask people who work with the candidates in some capacity, including peers and bosses, how likely they would be to recommend this person as a leader on a scale of 1 to 10. They would essentially be assigning Leadership Net Promoter Scores which can be calculated through a traditional NPS method.⁴

Both types of metrics can shed light on inclusion as well. When you analyze engagement scores and leadership ratings from the last 3-5 years, compare responses between underrepresented and majority groups. If leaders aren’t doing their jobs inclusively—a common problem—you’ll see a big gap between those groups’ responses. 

Also, consider each candidate’s team composition. How diverse are the team’s members? How equitably are they being compensated, developed and promoted? To some extent, unit and team leaders are hamstrung by those above them. That is, some of these factors may not be under their control, but under normal circumstances they should have the ability to influence many of these factors. For example, you will want to understand which people they are developing with stretch assignments, who receives mentoring and sponsorship, and what movement there has been for diverse candidates. The analytics need to be longitudinal to provide an accurate sense of how team members are advancing in their jobs and careers. If the same woman of color has been used to check the diversity box on succession plans or 9-box grids at the same level over the past few years, clearly that is not real progress and does not demonstrate effective inclusionary leadership.

Reliability

Finally, it is important to assess whether you can count on leaders to reliably execute on their goals. Do they consistently deliver what they say they are going to deliver? Do they consistently meet their budget goals year over year? 

Reliability may sound boring—after all, it’s table stakes for leaders. But it’s still a critical indicator of performance. Reliability builds credibility and trust; it creates confidence in a person’s leadership. As it turns out, a leader who can reliably deliver results is a rarer find than one might assume. CEOs who are known for being reliable are 15 times more likely than others to meet or exceed stakeholders’ expectations, and candidates’ odds of getting hired for the role are double those of everyone else if they get high marks in this area.⁵

How to measure it:

To gauge reliability, you may need proxy metrics for leaders who have never run an entire company. Look at how effectively they have run their respective parts of the enterprise—their business unit, say, or their regional office. Start with the number of years they’ve hit their financial targets over a five-year period. Have they consistently performed according to plan? How have they held themselves and their teams accountable? At a top five health insurance company, one business unit president who received especially high ratings on reliability utilized scorecards to track the business outcomes he expects his team to deliver both as a group and as individual leaders in their functions. Scorecards are common, but this leader was particularly disciplined about managing against the numbers: Every quarter, he spent half a day with his team reviewing their self-ratings on progress toward and probability of success for each outcome. Based on this process, team members emerge with a prioritized set of actions to increase their chances of meeting their targets.

It’s also useful to consider the bench strength that leaders have created within their own organizations over the past few years. Strong candidates for CEO succession know that leadership isn’t just about playing their role reliably. It is also about building a strong team under them so the organization can sustain itself over the long term. If they aren’t already leading with an eye toward their own succession, that doesn’t bode well for how forward-looking they’ll be in the top job.

Now What?

Amidst an ocean of information that could be considered, this study identifies four nuggets of data that are particularly salient when selecting a new CEO: decisiveness, adaptability, engagement and inclusion, and reliability.

Identifying and assessing candidates for any role, including CEO, is context-dependent of course. So, in addition to looking for the broadly relevant attributes we’ve identified, it’s critical to understand what’s needed to move forward in your business or industry. In one setting, adaptability might be the top leadership priority; in another, it might be reliability. Whatever order of priorities makes sense in your particular context, scouting for CEO candidates who score high in all four areas will strengthen your succession bench and, ultimately, your company’s leadership.

To collect and accurately interpret sufficient data in these four areas, boards will need to work closely with their partners in HR. Many organizations are investing heavily in people analytics so they can recruit, hire, develop and promote employees with greater precision throughout the ranks. Taking advantage of that momentum while simultaneously focusing on these four areas will provide decision-makers a clearer signal amidst all the data noise that they are presented. 

Shoma C. Hayden is Partner and Chief Innovation Officer at ghSMART & Co. LLC. She can be reached at shayden@ghsmart.com.

Dina Wang is Partner and Head of the Technology Practice at ghSMART & Co. LLC. She can be reached at dwang@ghsmart.com.

Elena Botelho is a Partner at ghSMART & Co. LLC and co-author of The CEO Next Door. She can be reached at elbotelho@ghsmart.com.

Brad Winn, Ph.D., is a Professor of Practice at the Covey Leadership Center and Executive MBA Director in the Huntsman School of Business at Utah State University. He serves as a Senior Editor for People + Strategy and is the Principal of Winn Consulting Solutions. He can be reached at brad.winn@usu.edu.

References

1 https://hbr.org/2021/05/the-high-cost-of-poor-succession-planning

2 For more on ghSMART’s CEO Genome study, see www.CEOGenome.com and also, The CEO Next Door by Elena Lytkina Botelho & Kim Powell

3 https://www.amazon.com/Why-Should-Anyone-Led-You/dp/1578519713

4 https://www.bain.com/insights/introducing-the-net-promoter-system-loyalty-insights/

5 https://ur.booksc.eu/book/72549597/85fb5e