AS a governance responsibility, CEO succession is arguably the most important decision that boards will make.
Given the volatility in today's financial markets and regional economies, shareholders are demanding the right to greater transparency in organisational management and governance. And clearly, a robust CEO-selection process is a reflection of those processes.
Yet, the persistent focus on CEO compensation has overshadowed a far bigger issue: ineffective selection and succession processes that, with increasing frequency, are leading to poor and very costly top executive hires.
The meltdown in the US financial services industry is probably the most profound testament to the mistaken notion that throwing more money at chief executive officers and senior executives enables them to make sensible and value-creating decisions. Pay can never be a substitute for solid corporate governance.
Not surprisingly, pay is also a popular focal point for many organisations in Singapore.
For most boards, it is often the only convergence point in discussing a difficult topic - the peculiarities, relationships, preferences and performance of the individual sitting in the CEO position. Unavoidably, it's personal. For several boards I have worked closely with, pay becomes a thickly opaque filter for signalling to the CEO what they are broadly happy or not happy with. Much of this, I suspect, is due to the complex relationships that exist between members of the board and the chief executive, despite the presence of non-executive directors and independent directors.
Organisations also tend to overlook key specifics of the role that potential CEOs have to fill. From our work with the C-suite, the top role has become increasingly complex and broader in scope, fuelled by industry consolidation, globalisation and ever-mounting pressures from shareholders to perform.
Job description
Many companies assume, usually incorrectly, that because senior executives have been anointed 'high potentials' based on their success in previous leadership roles, they will be equally successful when they reach the top job.
We have also seen boards that appear to have taken a page from the US presidential selection process, mixing past performance, popularity and politics without considering their relevance to the company's character.
The task of aligning CEOs and senior executives' behaviour with shareholders' interests has always been a difficult one. Nonetheless, boards must be prepared to defend their rigorous approaches in reviewing the depth, comprehensiveness and risks of a more extended process of sourcing, developing, selecting, onboarding and measuring the performance of a CEO. Pay should be the final complementary item.
So why are organisations having such a difficult time finding good CEOs? More often than not, it is because the selection and succession processes they have traditionally turned to have not kept up with the changing nature of the top roles.
Take Citigroup's Charles Prince, for example. A well-regarded corporate attorney, he had little real operating experience as a banker. Yet he was chosen to manage one of the world's most complex financial institutions.
Merrill Lynch's Stanley O'Neal, who successfully ascended the company's management ranks, also appears to have lacked certain prerequisites for the top job. 'Cold, aloof and uninspiring,' as one profile described him, are not competencies that serve chief executives well.
Most boards begin their succession planning by agreeing on a job description for the future CEO. And in the process, some will fail to take cognisance of the role in the context of the company's strategy and business model.
While industry experience and a clear track record in addressing relevant challenges are important, a thorough review of the strategic trajectory of the organisation - where it is today, where it is headed and the demands it will place on top jobs - may reveal unique aspects in the job's accountabilities that make all the difference in successfully targeting the right candidate.
Company strategy
Depending on the state and strategy of the organisation, the top leader may need to be a visionary who can reshape the company, a turnaround pro, someone with deep operational credibility or an individual with the savvy to work with investors and build trust and confidence.
Mr Prince shepherded his organisation through a shaky period and took the lead in cleaning up troubling business issues. But given Citigroup's losses and poor performance at the time of his departure, his successor needed a ready operational strategy and vision that could bring value and growth to the organisation.
Merrill Lynch, on the other hand, picked a successor who was known for rescuing and revitalising struggling organisations, including the New York Stock Exchange. Time will tell whether these decisions were good ones. They may well be, but then again, firms might not need a 'turning around' had the right leader been at the helm in the first place.
By focusing on the extended processes that go beyond pay, boards will be better placed with greater opportunities to discuss the requirements of the CEO's role and less the peculiarities of the person.
The writer is director for the South-east Asia region at Hay Group. Over the last 20 years, he has worked with clients dealing with rapid change, the impact of new technologies, and internal organisational pressures for performance across Asia. He is based in Singapore and can be reached at roland_ruiz@haygroup.com
This article was first published in The Business Times on October 10, 2008.
