Selecting the right CEO bl-premium-article-image

Shyam Pattabiraman Updated - March 10, 2018 at 01:03 PM.

There appears to be a dichotomy between the characteristics that seem to matter and the actual trend observed in companies.

CEO talent and skills could have a significant impact on their companies’ success. Steve Kaplan – a professor at the University of Chicago, Booth School of Business – along with two other co-authors recently published a research paper that provides new evidence showing which CEO characteristics and abilities have an impact on firm performance.

The study is based on detailed assessments of 316 CEO candidates for positions in firms funded by private equity (PE) investors – both buyout (LBO) and venture capital (VC) investors. Subsequently, the performance of selected candidates was reviewed to identify the correlation between specific characteristics and firm performance. The candidates were assessed on more than 30 characteristics covering the following attributes: Leadership, personal, intellectual and motivational.

Key Findings

Buyout candidates tend to score higher on characteristics related to a broader range of managerial and executive functions while VC candidates score higher on characteristics related to intelligence and vision. Success is not related to incumbency. Outsider CEOs score higher than incumbents on 19 of the 30 characteristics, although outsiders are hired less often.

Overall, the results indicate that the characteristics of CEO candidates vary along two main dimensions: in their general level of ability and in their tilt toward inter-personal or execution-related characteristics.

The results suggest that general talent matters for success. However, on the margin, execution-related attributes, not team-related attributes, seem to drive success. hat’s more interesting than the findings, though, is that at least according to Carl Icahn.

Icahn’s views

Carl Icahn, a renowned corporate raider in the 80s who is back in the circuit as a shareholder activist, has a big gripe about the CEO selection process in many companies across the US which, according to him, has turned anti-Darwinian, i.e. survival of the unfittest. Icahn believes that corporate America has gradually given way to CEOs who are the fraternity president type, i.e they are selected based on their likeability rather than on their execution skills.

Such candidates being politically good survivors, without promoting controversies or being a threat to their superiors, move up the ladder fairly quickly and eventually become assistant to the CEO. Once the incumbent CEO’s term comes to an end, the board chooses the assistant to become the CEO – again due to the likeability and non-threatening factor.

The fact that board members across many listed companies in the US do not own stock does not help the situation and only favours the tendency to maintain status quo. The new CEO now recruits someone with similar qualities but just not as bright – to avoid potential threat and the cycle continues. According to Icahn, the problem of ineffective CEOs could threaten the ability of many American companies to compete in the global marketplace and the American economy in general.

Takeaway

The good news is that since most Indian companies continue to be majority owned and run by promoters, there is less risk in terms of hiring the wrong CEO candidate or misalignment between the board and shareholders.

However, blind implementation of policies such as a mandatory number of external directors or wider dispersion in retail shareholding in the name of corporate governance, could possibly weaken control to the detriment of the firm.

(The author is a business consultant. The views are personal. Feedback can be sent to perspective@thehindu.co.in )

Published on May 25, 2013 16:24