March 14, 2024

The Massive Costs Associated with Executive Mis-Hires (TPL Insights #213)

By Rob Andrews

According to the Chief Executive Magazine article titled “What Causes CEO Failure”, up to one-third of U.S. CEOs last less than two years, with top executive failure rates as high as 75 percent and rarely less than 30 percent. In 2009, one major search firm CEO completed a study of 20,000 of his firm’s own placements. “We’ve found that 40 percent of executives hired at the senior level were pushed out or quit within 18 months. It’s expensive in terms of lost revenue. It’s expensive in terms of the individual’s hiring. It’s damaging to morale.” So said Kevin Kelly, CEO of Executive Search Firm Heidrick & Struggles, in an article published in 2009. Yes, it’s been fifteen years since Kelly’s study, but things have not changed.

According to the Harvard Business Review, two out of five new CEOs fail during their first 18 months on the job. Further research shows the same pattern globally. CEOs and senior executives are routinely hired based on their drive, IQ, and pedigree. They’re fired for lack of emotional intelligence, poor people decisions, cluelessness, and being out of touch with their workforces and customers.

In my view, the executive hiring process typically works like dating and marriage, with very similar results. Just like dating, we usually start out with a woefully inadequate description of precisely who we are, exactly what we are looking for, and specifically what we are trying to accomplish. While the framework of our process is complex, it need not be for you. Philosophically, we are fully aligned with Ram Charan, the world-renowned Harvard professor and advisor to boards and CEO selectors. See Ram’s thoughts on hiring in this piece, which I believe applies to every position in your company.

Because we usually rely on simple job descriptions and resumes, we typically do not define all the critical success factors in advance, as well as our specific performance objectives. Because we do not fast forward the tape and look into the future, the selection process becomes a beauty pageant and a chemistry contest. We hire a new executive because “it feels right”; he or she looks good, sounds good, smells good, and is, oh, so charming. Then, in three to six months, we start to have that queasy feeling in our gut that suggests we might have made a mistake and that things are just not working out. Roughly 50 percent of the time, within a year, we know we have made a mistake.

Facilitating a match that will truly work for the company and the candidate alike should be the primary goal of every executive search. We exist for the purpose of enhancing the lives and effectiveness of our associates, clients, and stakeholders. Our passion is building great cultures that deliver exceptional results and facilitating matches that work and last.

We have read literally hundreds of books on hiring, search, selection, interviewing, reference checking, background checking, and the like. Most of the material I have read is of very little use. It is either entirely anecdotal and without basis in fact, or it was purely theoretical in nature with little basis in reality.

In the pursuit of a process that minimizes executive hiring failure, we have studied over 5,100 failed executive placements and determined the reason for each failure. While no process involving human beings can ever be perfect, our consultants seem to have broken the code when it comes to avoiding the most common hiring mistakes, and we are happy to share what we’ve learned.

Many searches are destined for failure from the outset because many (if not most) of the important variables are neglected. Many searches are executed with little more than a job description. The typical job description is nothing more than a list of attributes all based on background, experience, and credentials, i.e. ten years of this, an MBA in that, etc. The job description is an important component of a comprehensive search specification. It does not, however, provide an adequate or appropriate roadmap for an effective search.

Every physician takes the Hippocratic Oath before he or she can graduate from medical school, become licensed, and begin to practice medicine. Unfortunately, there is no such licensing or certification process for retained executive search professionals, nor is there any such mantra or sworn oath. In our judgment, there should be: MAKE NO ASSUMPTIONS. Every senior level search should start with a clean sheet of paper. Relying on the by-products of recently conducted similar searches to present yet another list of the usual suspects is a practice which should be avoided at all costs.

Remember that the business-as-usual approach to hiring CEOs and senior executives leaves much to be desired.

“Business-as-usual” questions in selecting search firms include:

  • How many searches have you done in this industry?
  • How many similar searches have you done during the last twelve months?
  • What does your network look like in our industry?
  • How many CEO searches have you conducted in our industry?

Here is a better set of questions to ask:

  • What is your successful delivery rate? Are you committed to completing every engagement?
  • What is your performance and/or retention rate at the two-year mark?
  • What is the total number of searches you have conducted and over what period of time?
  • Do you conduct comprehensive primary research on every search?
  • What does your needs-analysis process look like?
  • How many of your competitors are off limits to you?
  • What kind of analyses or metrics will the firm measure potential candidates against?
  • Will the firm require its candidates to complete a self- appraisal and submit to reference audits?
  • How will you assess the cultural and performance fit of candidates you present?
  • Will you conduct cursory reference checks on one candidate or comprehensive 360-degree audits on all finalists in advance of presentation?
  • Can you coach me on team fit and effectiveness?
  • Who conducts background investigations and in what manner?
  • How long will the search take?
  • Is the firm flexible, focused on me and willing to customize my search?
  • Is the firm capable of assisting me in the successful integration of the newly hired executive?
  • Will you provide me with meaningful market information collected while conducting my search?

I have thrown a lot of stuff at you to get you thinking. The failure rate among newly placed executives stinks, and it is getting worse. Every time one of these misfires occurs, bad things happen.

We believe retained search should be practiced as it was intended, as a specialized form of management consulting, not as a transactional exercise of filling seats in a vacuum. Leadership engagements should be delivered with sustainability in mind, rather than selling off-the-shelf products or cookie-cutter solutions, that don’t solve the client’s problem. As such, we promote the following standards and professional practice guidelines:

 

  • Purpose – We serve with an absolute commitment to enhance client performance and place the client’s interests above their own.
  • Transparency – Our clients have access to our project management system and can see in real time every meaningful detail of each search, including conversations, notes, and due diligence.
  • Discovery – We gain a comprehensive understanding of each client’s unique culture, specific performance expectations, and critical success factors.
  • Performance – We track and report retained search time to fill, completion rates, retention, and offer-acceptance ratios.
  • Integrity – We ensure the leadership and training solutions, assessments, and workshops that we deliver are in the best interests of the client.
  • Due Diligence – Members conduct assessments, reference audits, and background checks before presenting finalist candidates, to screen out all but A Players.
  • Persistence – We follow through on each engagement until its completion, without time limitation.
  • True Search – We commit to thoroughly canvasing the market and present talent NOT on the radar screen of the search community at large.
  • Alignment – We will assess candidates to ensure cultural fit and the ability to deliver on specific strategic and tactical performance expectations.

Warmest Regards,

Rob