Searching for a Corporate Saviour 6/10

Sep 05, 2020

Part 5.

Creating the Candidate Pool: The Social Matching Process

The “acceptability” of a candidate is more important to Boards than the candidate’s skills necessary for the position. This leads to a very narrow candidate pool with people indistinguishable from each other and the previous CEO.

While the candidates come from exec search firms and Board’s connections, the ones being paid attention to are already Board members elsewhere.
The key criteria (after extensive sifting of the candidate pool) are: the current position of the candidate, the performance of the candidate’s current firm and the stature of that firm.
If a promising candidate is from a slightly underperforming firm (that had nothing to do with his/her performance, they will be ignored, as only stars need apply.
At the same time, the selection process is social matching: the candidates are difficult to select due to information asymmetry and are often indistinguishable from each other. Selection is being made on the best observable features of a candidate, but this creates a very narrow pool.

Many search committees feel that the candidate needs to have a previous experience leading a large corporation – this supposedly reduces uncertainty. And also some other Board has already made a decision to hire this person.
I.e. the fact that a person is already a CEO is a reliable signal for their fitness for purpose. And of course, such candidate ticks some or all of the “traits” boxes, the degree of responsibility for a mistake is lower.
The differences between CEOs (other than styles and personalities) are not as big, and they look substantially the same.
A lot of candidates are “corporate survivors”, not leaders.
Socialization in the executive suite and self-selection en route produces very similar candidates. All of the people on top are corporate survivors. But their ability to navigate complex politics is not valued by Boards looking for “leaders”.
While instinctively logical, the narrow selection criteria are nothing but a bias.

In most external CEO searches candidates are categorized according to the performance of their current firms. Firm performance is an observable (and hence – believable) metric.
One can’t run an A/B test on CEO-less companies and see how they perform.
Statistical techniques for comparing like companies are not convincing.
It’s hard to accept that the firm’s success is linked to its brilliant CEO and not external factors / luck / market timing, as thinking otherwise would force the Directors to rethink their own career trajectories, which hurts as the answer is obvious. And it’s not that corporate meritocracy works.
And again, if the business media and analysts believe in the link between the firm’s performance and the star CEO – it’s easier to just accept this as a fact and move on.
As a result, CEOs – mediocre beneficiaries of “good times” - are ranked higher than capable CEOs of companies in unfavourable circumstances. [MK: it’s a very typical situation everywhere on the corporate ladder when the success of a person is defined not by their performance, but by the projects they were part of.]

Hiring firms always compare the status of the firm the CEO candidate comes from to their own. The assumption is that the CEO owns the status of his/her firm, hence hiring them would borrow the social status of the more reputable company. This may account to up to 80% external hires.
The thirst for status is explained by the status games in the broader community: in the conditions of uncertainty [COVID?] firms exploit their affiliations with other economic actors to signal their quality / worth and high survival probability. Hence, hiring an outsider from a higher profile firm may lead to the increased perceived confidence of its prospects.
Also, a star CEO can supposedly elevate the firm to a higher circle of companies (Forbes XXX, Fortune YYY, etc).
Status differences are obvious to Directors and serve as an explanation to the outside world as to why a particular CEO was chosen from a shallow pool of seemingly indistinguishable candidates.
Directors instinctively tend to lower their guards in questioning high-status celebrity CEOs regardless of possible inconsistencies in their stories.

Since the info about external candidates is not easily obtainable (or until it’s too late), Directors use their network (including other Directors in interlocking directorates).
The larger the network and the more info that can be obtained about a particular candidate – the higher the chance of appointing an external candidate.
This becomes a self-fulfilling prophecy: trying to create a larger candidate pool fails precisely about new blood doesn’t have too big of a dossier made about them by the Director community; hence making the pool ever shallower.
By reinforcing the old principles, the Directors keep rebuilding the old and homogenous organizational structures.

Part 7.