One of the most important decisions a board faces is hiring the right CEO. Assessing the ex-ante fit and likelihood of success is difficult; therefore, it often leads to a lengthy search process. I would like to share a few practical insights on how the market for CEOs is evolving and which attributes seem to correlate with a successful match.
First, we need to acknowledge that while all boards engage in a costly search process, CEOs tend to come from a very small pool of candidates. An overwhelming 80% of new CEOs are promoted internally, which may underscore the importance of company-specific knowledge and established networks. However, this practice invites scrutiny. It could mask potential inefficiencies and the risk of insular thinking when companies face disruption or must delve into a transformative phase. As a benchmark, consider that private equity firms, often lauded for their focus on performance, tend to look externally for 75% of their CEO hires.
Second, CEO profiles have been shifting towards more general and transferable professional backgrounds: often involving prior positions in different industries. Candidates who bring a fresh perspective from the outside have a wage premium. A generalist CEO profile is associated with 20% premia relative to a more specialist one.
Third, behavioral data reveals that CEOs tend to display two predominant styles of leadership: the "Manager" and the "Leader." We need to think of these styles as on a continuum for each CEO. Manager CEO’s have a more hands-on operational focus and are experts in setting up systems, while Leaders focus on strategic vision and broad-based communication, and are experts in creating organizational alignment. The effectiveness of these two styles depends on the specific needs of the company, that is, the match is key. Companies facing operational challenges can find great value in a manager’s attention to detail and process optimization. Meanwhile, large firms undergoing radical transformations or pivoting in response to market changes may benefit more from a Leader's vision-setting capabilities. Research suggests that around a 20% of firms could have CEO mismatch – either due to labor market frictions in specific geographies, or to due to individual frictions of managers trying to evolve from managers to leaders.
Fourth, the abilities required of a CEO differ from those of other top executives. CEOs are distinctly strong on four dimensions: General Ability, Execution (at the expense of Agreeableness), Creative/Strategic and Charismatic (a combination of enthusiasm, persuasion, proactivity). Interestingly, other executives such as CFOs or COOs differ significantly in these four dimensions. CFOs are the most divergent: they tilt strongly towards Analytical and Interpersonal/Agreeableness at the expense of the Strategic and Execution dimension. There is also some evidence that boards tend to overweight interpersonal skills at the expense of execution. These factors are predictive of who gets hired and, therefore, provide guidance for becoming a CEO. That is, you can modulate your abilities.
When boards evaluate the most suitable CEO, they should consider the match, not just the candidate’s profile. Additionally, they should be aware of certain biases: overweighting internal candidates, and certain abilities, such as interpersonal capabilities at the potential expense of execution or undervaluing creative ability to identify new growth projects amid uncertainty.
2024 IESE ECGI CORPORATE GOVERNANCE CONFERENCE
The 2024 IESE-ECGI Corporate Governance Conference focused on the theme: “Towards a New Model of Boards of Directors”. The different speakers helped analize and debate how boards of directors can navigate challenges like climate change and sustainability, strategy and digital transformation, and CEO succession planning. Leading scholars from various fields, along with CEOs and chairpersons, offered insights on improving governance in today’s disruptive environment.
The IESE 2024 Survey of Boards of Directors provides a unique description of how board directors understand and organize solutions to some critical challenges for their companies: corporate purpose, the board as a team, CEO and leadership development and succession and the role of the board in strategy. This report provides an analysis of the results. You can download the IESE 2024 Survey here.
NEWS&TRENDS.
As we have argued several times in this newsletter, ESG is a useful notion that encapsulates a series of critical risks some investors care about. For a while, the concept was not very accurate, yet played a role for investors. A bundle of different, heterogeneous concepts that are difficult to measure, the logic of ESG can be confusing. The result is that ESG rankings and ratings have lost their novelty, as well as their usefulness. Moreover, some recent events have exposed its lack of consistency in assessing a company’s sustainability performance. It may be time to think about unbundling ESG, as Ronnie Chaterji and Micael Toffel argue in this article: It’s Time to Unbundle ESG (hbr.org).
CEO succession planning is one of the most critical jobs of any board of directors. Unfortunately, Disney and other companies have recently been on the spotlight for their repeated inability to get the CEO succession process right. FTI consulting discusses the latest news on this process: Inside Disney’s Star CEO Wars | FTI Consulting. The article offers many interesting lessons that can help carry out boards effective CEO succession process.
As AI continues to advance, offering new solutions for companies and different business activities, boards are becoming increasingly aware of the need to better understand technology and assess its implications for the companies they serve. This Deloitte article highlights several conversations boards should have on digital technology: Elevating tech leadership in the boardroom | Deloitte Insights.
Global board trends are partially shaped by the most recent proxy season and shareholders’ vote in their annual meetings. This Glass Lewis article provides some useful facts and data on how shareholders have assessed and voted on board composition and diversity in 2024: Proxy Season Global Briefing: Board of Directors - Glass Lewis.
Good companies require adequate disclosure of their performance to be able to communicate with employees, shareholders and other stakeholders. The new EU Corporate Sustainability Reporting Directive (CSRD), a new reporting framework on climate and other social issues, is being implemented in the EU. The CSRD is about a lot more than compliance | PwC discusses some critical issues that boards may find useful when thinking about sustainability disclosure.
IESE's
RECENT research.
GH.L. Friedman and G. Ormazabal (2024): “The role of information in building a more sustainable economy: A supply and demand perspective”, Journal of Accounting Research (forthcoming).
