Boards of Directors Must Own Responsibility for Poor CEO Hires
Boards of Directors own responsibility for CEOs who behave in unethical or corrupt ways. It’s disappointing that reality isn’t often discussed in media or with employees of organizations. Yet for other executives in the organization, boards don’t have to own that same duty.
Ram Charan wrote about the problems and pain this creates in his article The Secrets of Great CEO Selection, published in the Harvard Business Review.
“Nothing good comes of having the wrong CEO,” he writes. “Mentoring, coaching, senior team members with complementary skills, and special help from the board can’t compensate. The misses are devastating — and very public. Yet some boards still pick chief executives who aren’t right for the job — repeatedly.”
Boards don’t always get it right in hiring and sometimes they miss spectacularly in their judgment, decision making and hires.
“The board bears responsibility for hiring CEOs who have severe character deficiencies but not for other bad hires,” says Linda Henman, Ph.D. and a coach, consultant, speaker, author and founder of Henman Performance Group, a leadership consulting firm.
Behavior shortcomings, impulse struggles and severe character deficiencies like a lack of ethics, narcissism, hot and cold anger, resistance to listening and corruption are highly damaging within an organization and often continue without being addressed, mitigated and corrected.
As to why this can happen more often than it should, it might very well be because of the approach to hiring.
“Boards are obligated to do their due diligence in hiring a CEO, but many directors think they can do this with no outside help,” Henman says. “Therefore, they base their hiring decisions on subjective responses to candidates, often preferring a candidate that is most like them, even when the company needs someone different.”
This is natural human behavior yet it can be unreliable evaluation and low-quality decision making.
“When the stakes are highest, boards need objective, reliable data that only an external expert can provide,” Henman advises. “HR plays a role in CEO selection, but should never make final decisions. In fact, HR should never make a final decision about hiring anyone.”
Human resources is not a hiring function but instead one of research, investigation, legal compliance and record keeping.
“Their job is to screen candidates for positions and then to help the hiring manager make the decision by aggregating data and streamlining the process,” Henman says.
And when HR does make the final call, that is an error, Henman warns.
“Leaders who delegate hiring decisions to HR abdicate one of their major responsibilities and should bear the blame if those decisions go wrong,” she says.
CEOs who embarrass their organizations inflict a high cost, not only on their name, reputation and careers but also on credibility, trust and relationship quality. It comes with great expense to name and reputation.
“Research shows that a bad hire anywhere in the organization will cost the company about four times that person’s base salary,” Henman says of the research, adding a more powerful point, “However, a bad CEO hire costs the company much more than that, whether a scandal breaks or not. Bad PR at the top of an organization can have devastating repercussions.”
One study published in the International Journal of Financial Research has estimated the cost of suddenly losing a CEO, without a quality succession plan, to illness or death, to be on average, approximately $136 million.
Yet the findings, covered by Adam Dean in MIT Sloan Management Review, also says that when a “CEO is fired amid controversy, the cost to an organization’s reputation and market may be even higher.”
Higher than $136 million.
It seems to reason then that 1) boards would greatly benefit by becoming more skillful in hiring for character, including self control and ethics 2) not making that process so insular 3) create, test and improve a trustworthy monitoring plan for early detection of dysfunction 4) promptly, fully address troubles and 5) have a personalized evaluation and plan of action for improvement and development commitment for CEOs and the management team.
Michael Toebe is a specialist who helps individuals and organizations accurately evaluate and wisely respond to reputation crisis and scandal. He writes Red Diamonds Essays and Reputation Specialist Essays (both on the Medium platform) and contributes analysis and advisory for: Chief Executive, Corporate Board Member, New York Law Journal, Physicians Practice and Corporate Compliance Insights. He is the voice of the Red Diamonds Podcast.