Corporate Boards Are Failing in Their No. 1 Duty

I came across an interesting article by Harvard Business School titled?“Corporate Boards Are Failing in Their No. 1 Duty,” which discussed when CEO appointments go wrong. What are the five common mistakes boards of directors make when selecting leaders? 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.

I will summarize the cases mentioned in this well-researched article and the five common mistakes that companies often make when choosing the right CEO.

Here are three examples of poor leadership at public companies, and explain how these failures can be addressed.

General Electric's transition from Jack Welch to Jeff Immelt was the most publicized CEO succession process in this century. The board deferred to Welch in a highly public selection process, favouring the sales-focused Immelt over someone who could transform GE to prepare the company for the future.

Boeing lost sight of its purpose to produce safe, high-quality airplanes and focused on maximizing short-term shareholder value. Over the past quarter century, five successive CEOs have failed, with each focusing on short-term earnings at the expense of franchise value and safety.

Wells Fargo faced a similar situation, with John Stumpf and Carrie Tolstedt creating 3.3 million fictitious consumer accounts, leading to his forced retirement and his replacement by Tim Sloan. Charles Scharf succeeded him in 2018 to restore regulators' confidence.

Microsoft, on the other hand, chose insider Satya Nadella as its next CEO in 2013, who changed Microsoft's strategy, challenged Amazon in the cloud with Azure, acquired LinkedIn in social media, Activision/Blizzard in gaming, and invested in OpenAI to gain control of ChatGPT. Nadella transformed Microsoft's culture from an arrogant bureaucracy into an empowered organization focused on growth and empathy for fellow employees and customers, driving Microsoft stock up tenfold.

Companies often make five mistakes when choosing the right CEO:

1. Companies are not grooming successors within the company; many boards focus primarily on emergency succession, neglecting to develop long-term candidates. The ideal future CEO should be at least 10 years from the company's typical retirement age, with a development plan prepared for each person. Board members should get to know these leaders over time, such as the Goldman Sachs board.

2. Companies often choose a successor who pledges to lead the business in the same direction as the current CEO, not considering the challenges the company will face in the years ahead. This approach can lead to repeated CEO failures.

3. Business allows the current CEO to dominate the hiring process, this can lead to a lack of understanding of the company's culture and how to manage its people effectively.

4. Companies often choose outsiders who may not fit well with the company's culture, as they may not know the candidates or their strengths and weaknesses, leading to a poor selection process for effective management.

5. Companies often don't give the new CEO a clear mandate; only later do they realize the disparity between the CEO's chosen direction and their expectations. Thus, boards should clearly assign the oversight of the company's leadership development process to the NRC committee.

#governance #boards #succession