Ask board members their most important duty, and they will likely say it is appointing and overseeing the CEO. Yet many boards fail to make appropriate choices, often because they don’t prepare candidates for the challenges they will inevitably face after stepping into the role.
When CEO appointments go wrong
Let’s begin by taking a look at three examples of poor leadership at public companies and addressing what went wrong. Then, I will recommend five ways boards can ensure they appoint the right leader as CEO:
- General Electric: The most publicized CEO succession process in this century was GE’s transition from Jack Welch to Jeff Immelt. In 20 years at the helm, Welch had grown shareholder value from $14 billion to $400 billion and Fortune had named him “Manager of the Century.” Immelt, meanwhile, went on to preside over the demise of GE for 16 years as the company lost $300 billion in shareholder value. The GE board had deferred to Welch in a highly public selection process, which had favored the sales-focused Immelt over someone who could transform GE to prepare the company for the future, just as Welch had done in the early 1980s. Immelt never developed a clear strategy for the enterprise and repeatedly tried short-term fixes, all while depending too heavily on financial earnings, rather than innovation.
- Boeing: The world leader in aviation for 100 years, Boeing lost sight of its purpose to produce safe, high-quality airplanes and focused instead on maximizing short-term shareholder value. Over the past quarter century, five successive CEOs from Phil Condit, Harry Stonecipher, and Jim McNerney to Dennis Muilenburg and David Calhoun have failed. In this case, the board’s mistake was not just in its selection of leaders; it was in failing to think long-term. Every Boeing CEO has focused on short-term earnings, increasingly at the expense of franchise value and safety. Will the company’s new CEO have the courage to return Boeing to its former position as the world leader in aviation?
- Wells Fargo: Wells Fargo sailed through the 2008-09 financial crisis without incident, but then, under the aggressive leadership of John Stumpf and consumer banking head Carrie Tolstedt, the company created 3.3 million fictious consumer accounts. This led to Stumpf’s forced retirement and his replacement by COO Tim Sloan, who was also forced out in 2017. Sloan was succeeded in 2018 by Charles Scharf, who has focused on cleaning up the messes and restoring the confidence of regulators.
These succession failures illustrate some of the risks companies face during CEO transitions, and they raise some obvious questions: Where were their boards of directors? How could they sit by passively while these great companies imploded? Why did they fail to select CEOs who could run these vaunted companies more successfully?
Choosing the right person for the job
Before examining the root causes of these succession failures, let’s look at one board that got it right:
- Microsoft: In 2013, the Microsoft board recognized that the company needed a leadership change as its stock had been flat since CEO Steve Ballmer had taken over in 2000 from founder Bill Gates. By doubling down on its proprietary Office and Windows software applications, Microsoft had missed out on taking a lead in multiple innovations, including smartphones, search, online purchasing, and social media. Lead director John Thompson led the board committee that chose insider Satya Nadella as its next CEO. Nadella completely changed Microsoft’s strategy, moving aggressively to challenge Amazon in the cloud with Azure, acquiring LinkedIn in social media and Activision/Blizzard in gaming, and investing in OpenAI to gain control of ChatGPT. Equally important, he transformed the Microsoft culture from an arrogant bureaucracy into an empowered organization focused on growth and empathy for fellow employees and customers, driving Microsoft stock up tenfold.
Top five mistakes companies make in choosing the wrong CEO
The dramatic differences in the results of these CEO changes raises the question: Why is it so difficult to get it right? Here are five mistakes boards often make when handling their most important responsibility—hiring the appropriate leader for the job:
- Companies are not grooming successors within the company. Many boards focus primarily on emergency succession in case something happens to the CEO, rather than keeping their eyes open for possible successors at all times. Instead, they should be developing a half-dozen or more leaders who could be long-term CEO candidates. The ideal future CEO should be at least 10 years from the company’s typical retirement age, so they have sufficient time in office to make transformative changes in the company’s strategy and culture and to oversee the outcomes. A development plan should be prepared for each person to provide the varied experiences required if they are chosen, with opportunities to shine in different roles and exposure to the external challenges they would likely face as CEO. Board members need to get to know these leaders over time, perhaps by inviting them to lunches, as the Goldman Sachs board does.
- Companies often choose a successor who pledges to lead the business in the same direction as the current CEO. All too often, the board is satisfied with the company’s current strategy and hasn’t given sufficient thought to the challenges the company will face in the years ahead. While it is impossible to completely predict the future business environment, boards should be looking for leaders who are visionary as well as adaptable to changing external conditions and are able to redirect the company to head in new directions to meet future needs. The Boeing board’s repeated CEO failures resulted from this approach of choosing people who applied the same leadership formula.
- Business allow the current CEO to dominate the hiring process. Many boards fail to take control of the succession process, preferring to let CEOs control which candidates are presented to the board. This is a mistake because CEOs typically won’t choose successors who are quite different and may undo their strategies. The board has more emotional distance from the CEO job than the current incumbent and can provide some much-needed perspective. In the case of GE, the board deferred to the CEO, Welch, who selected someone who complemented him versus the strategy-focused successor GE needed.
- Companies choose an outsider who is a poor fit with the company’s culture. When the board decides to look outside for candidates, executive search firms provide a slate of well-qualified candidates, who on paper look superior to internal candidates whose strengths and weaknesses are already well-known. But the board doesn’t really know them or understand how well they mesh with the company’s culture. As a result, they may choose someone who doesn’t understand the nuances of the business or how to effectively manage its people.
- The board often doesn’t give the new CEO a clear mandate. Too many boards fail to give their new CEOs specific guidance about their expectations. Only later do they realize the disparity between the CEO’s chosen direction and their expectations, which can lead to a permanent breach. When Omar Ishrak became the first outsider CEO of Medtronic in 2011, the board gave him a clear mandate: to revive the company’s reputable innovation process and restore discipline to its operations. That direction enabled him to move forward with clarity.
In recruiting Bob Nardelli from GE, Home Depot’s board failed to choose someone who understood the retail business enough to recognize that the company’s competitive advantage was built around customer advisers and store managers who had the freedom to source materials unique to their marketplace.
In his zeal to increase short-term earnings, Nardelli got rid of the customer advisers and centralized procurement while standardizing store offerings. The result was a disaster, as customers started shopping at arch-rival Lowe’s. After Nardelli was terminated, his successor, Frank Blake, restored Home Depot’s culture, and the business flourished.
If the board is serious about its responsibilities, it should form a committee to oversee the company’s leadership development process, taking the time to identify candidates and review their development plans. Only in this way can it begin to fulfill its most important responsibility: ensuring the company chooses the right leader for its future.
Bill George is executive fellow at Harvard Business School, where he has taught leadership since 2004. Previously, he was chair and CEO of Medtronic; an executive with Honeywell and Litton Industries, and served in the US Department of Defense. He has also served as a director of Goldman Sachs, ExxonMobil, Novartis, Target, the Mayo Clinic, and World Economic Forum USA.
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