Leadership is part art, part science and perhaps a bit of alchemy. Selecting individuals to lead companies has become more complex for boards of directors. CEOs must address the interests of all stakeholders — not just shareholders. Organizations should consider grooming honest and proven managers from within to better align with compliance controls, ethics mandates, and financial controls.
Old-school, C-suite executive recruitment failures have been in the headlines a lot in 2020:
- “Former Bumble Bee CEO Lischewski Sentenced to 40 Months in Prison”
- “Ex-Pharma CEO Gets Over 2 Years in Prison for Bribery Scheme”
- “San Rafael Biotech Firm’s Former CEO Convicted of Fraud, Money Laundering.”)
As some executives climb corporate ladders, the harder it might be for them to maintain an ethical grip. Boards invest time and money recruiting leaders with the hope they can set visions, increase revenues and boost shareholder value.
Sometimes those hires backfire.
The U.S. 2002 Sarbanes-Oxley Act tightened corporate governance by prohibiting CEOs from loading boards with friends and associates. But legislation and corporate policy can’t prevent human behavior subtleties from intervening.
Bias in board decision-making
“Choice-supportive bias” is the tendency to stick to bad choices, such as hiring flawed CEOs, even as situations worsen. Boards can use this bias as a self-preservation mechanism to strengthen their resolve if they choose to stand by failing C-suiters. Board members can selectively recall positive accomplishments of CEOs’ tenures while hoping the fires in the boardrooms extinguish themselves.
We’d all like to think that opposing hard facts would adjust our thinking and challenge us to change our strong beliefs and opinions. Apparently, not so. Contradictory evidence tends to strengthen our deepest convictions — not reverse them. This suggests our brains prefer to set aside critical thinking in favor of faulty positions or beliefs. (See “The backfire effect.”)
Organizations compound their problems when they hire outside CEOs and other C-suite executives without appropriate due diligence.
Risks from hiring outside the organization
In Richard Steinberg’s seminal book, Governance, Risk Management, and Compliance,“ he writes that S&P 500 non-financial companies, in a 20-year study, appointed internal candidates to CEO positions who “significantly outperformed those that bring outsiders to the job.” The study also showed that the cost of attracting external candidates was much higher — by as much as 65 percent — than for internal CEO hires. Four in 10 CEOs recruited from the outside leave their companies after two years and nearly two-thirds exit by their fourth year with expensive golden parachutes easing the descent.
Organizations still debate the pros and cons of promoting managers to CEO positions or hiring externally. But if an organization needs a turnaround specialist or crisis management expert at the helm, the board might search the open market for likely candidates with those unique skills and experiences.
A major challenge for outsiders is building credibility, trust and rapport with board members. They probably haven’t worked together, so they need to take time to engage and become comfortable with each other — a process that can take months or years.
Incoming outsiders must be sensitive to how boards and others will scrutinize their early decisions or initiatives. However, it’s easier for an incoming outsider to overhaul or reverse prior decisions or move those who might have had a hand in implementing them. (See “CEO 1000: Insiders vs. outsiders.”)
Risks from promoting inside the organization
Incoming insiders have their own set of challenges especially when they change members of the management team with whom they might have enjoyed positive working relationships. An incoming insider needs to be sensitive to how colleagues might perceive these employment decisions, convey the importance of having the right team and get alignment from the rest of the executive team and/or board. (See tinyurl.com/y4pxy2d3.)
If one day you were a member of the team and the next you were its manager, you remember how your former peers had to adjust their perceptions of you in your new role. You might have had to have one-to-one conversations with some so they could perceive you as a highly capable leader, recalibrate their relationships with you and so they and you could communicate mutual expectations.
Let’s talk baseball for a minute
Board members who opt to hire CEOs from outside their organizations should read Michael Lewis’ 2003 book, Moneyball (W.W. Norton & Company) or see the Brad Pitt movie of the same name. This is the story of the Oakland Athletics’ baseball team that exploited — disrupted is a better descriptor — industry market inefficiencies to experience one of the best seven-year runs in franchise history.
Instead of traditionally loading the team with superstar athletes, the Athletics focused on developing the existing roster of lesser-known talent that could play more than one position well, and had overall position-by-position balance and depth off the bench — so all players at one specific position had equal talent. The Boston Red Sox and Houston Astros followed the same strategy, and each won World Series championships. (However, unfortunately, both teams were later caught cheating.) See “MLB reveals Red Sox’ cheating scandal, tainting yet another championship team“).
Bringing talent up through the ranks
Baseball teams have learned to develop talent by bringing players through minor league teams. They learn systems, work with teammates and team coaches, improve technical skills and increase knowledge of the game.
From my lifelong interest (and Little League involvement) in the sport, I’ve found that baseball players mature in structured environments. Their organizations mentor them to handle fame, fortune and distractions of the big-league bright lights. Individual players function better as a cohesive team rather than relying on the one or two home-run sluggers or the pitching ace throwing physics-defying sliders and curve balls at helpless hitters.
The baseball analogy parallels what happens when some organizations go outside their corporate walls to reel in superstar C-suite executives by dangling excessive compensation. In Moneyball, author Lewis tells of the relationship of insiders versus outsiders (organizations pay groomed insiders less than those they hire from outside) and the ever-increasing capitalist demands of market efficiencies — to which professional baseball isn’t immune.
Global leadership development is using Moneyball principles
According to a TechNavio market research report summary, the global corporate leadership training market from 2020 through 2024 is expected to post a compound annual growth rate of 14% or about US$26.7 billion.
TechNavio’s research also shows that organizations are increasingly spending on leadership training because it’s more cost-effective for organizations to fill senior positions from within their hierarchies rather than hire external resources. (See “Global Corporate Leadership Training Market 2020-2024.”)
That’s what I call “Moneyball Leadership,” which is about building depth, creating engaging relationships at all levels over time and strengthening positive influence throughout organizations. Organizations are quickly recognizing leadership succession training is essential to efficient functioning and financial health. (See the figure below.)
However, all’s not rosy for succession planning because organizations might not always find their managers are willing to move into top positions. In 2019, DDI, a global leadership consulting firm, developed its Frontline Leader Project. The endeavor, which surveyed more than 1,000 leaders and executives, found that only one in 10 wants a seat in the C-suite, 34 percent of managers would like to move up just one level into an operational leadership position and 11 percent had no interest in steering the ship in a CEO position.
Organizations must recognize high-potential managers earlier in their leadership development processes, such as a first-base coach who shows promise as a manager. They must prioritize player growth into those ever-expanding roles and identify select candidates for higher leadership succession over their careers as team leaders, coaches, managers and perhaps even in positions in the organization’s front office.
Apply the Moneyball Leadership Model within your organization to:
- Identify internal talent
- Teach them your systems
- Grow them into leaders who understand your people, culture and processes, and then let them shine
- Share the why behind the how and vice-versa to help others receive the clarity of vision for moving forward
- Keep asking others, “Are there any obstacles that might prevent you from achieving your objectives?”
- Listen and pay attention to the sights and sounds that will help prevent and deter threats to the enterprise, such as fraud.
Ensure managers understand that building connections with others takes precedence over claiming authority over them. They can’t have faith in your organization without believing and trusting in who you are. Take the time to nurture your own Triple-A talent so they can more easily put together consecutive winning fiscal seasons rather than using the Wall Street scorecard of quarter-by-quarter (the equivalent of inning-by-inning) results.
After all, it doesn’t matter who’s ahead at the seventh-inning stretch; what matters is who’s winning playing by the rules at the end of the game.