Better Metrics for Choosing CEOs

10/3/14

The elevation of an individual into a CEO role results in a tremendous change in the level of complexity they are required to deal with. Internally they might have to be able to understand diverse businesses located in diverse industries and/or dispersed across a large number of geographic regions. Externally they must deal with a larger and more varied set of stakeholders including shareholders, analysts, and the press. Being able to gather information to best predict who will be most able to make this transition presents an immense challenge to organizations.

In my last blog I noted how on the most recent HR@Moore Survey of CHROs we found that firms tend to use things like past performance accomplishment, past developmental needs, etc. as the most frequent assessment tools for evaluating CEO succession candidates. I also questioned why they did not use more formal validated assessments such as testing (personality and cognitive ability), assessment centers, and structured behavioral interviews. Let me explain why.

In exploring how firms seek to gain information on those who aspire to the role, it seems that three generic dimensions of the candidates require assessment. "Performance" refers to a track record of past accomplishments that indicate both a requisite level of business savvy, leadership, and accountability. This dimension is clearly captured through reliance on past performance profiles and past development needs. This is clearly the most popular assessment technique. However, the weakness of this dimension is that because the nature of the CEO role is so different, as the mutual fund companies warn in their commercials, there is no guarantee that past performance will be indicative of future performance.

"Capability" refers to the basic competencies, leadership style, and other characteristics that one would expect in the CEO. It assesses the KSA's that are required for a CEO. This could be assessed through assessment centers, behavioral interviews, work simulations, business simulations, and cognitive ability tests. This dimension is probably correlated with the Performance dimension, but does have some unique aspects that could be missed by solely relying on past performance.

The "Potential" dimension describes the ability of the individual to quickly and effectively adapt to the new requirements of the CEO role. Given the step-change in cognitive, emotional, energy, and interpersonal requirements, this dimension seems the most important in terms of an area of risk, and the least developed in terms of assessment tools to effectively evaluate individuals. Based on decades of assessment research in the personnel selection literature, it seems that firms might reduce this risk by relying more on existing (e.g., personality testing, psychological assessments to evaluate adaptability) and developing (assessment centers and/or business simulation aimed specifically at the new requirements in the CEO role) techniques that provide additional insights into a individuals behavioral tendencies and potential areas of weakness. Perhaps by pushing for more thorough and rigorous assessment of additional characteristics and insights into CEO succession candidates, CHROs can add significant value to the board's CEO succession process.