Investor's Business Daily, July 27th, 2007
Talk about changing the rules of the game.
A decade ago, CEO wannabes sailed through the board selection process by acing a relatively short list of subjects.
Would-be chief executives needed to be spot-on about challenges like the tech revolution, industry consolidation, globalization and customer needs.
But that was before wild cards like China, India and Sarbanes-Oxley accounting rules changed the name of the CEO game forever.
Dayton Ogden, the global leader for executive search firm Spencer Stuart's CEO practice, says changes in the skills sets required of prospective CEOs are tied to a switch in who's overseeing the CEO succession process.
"Boards are driving it -- not CEOs," said Ogden, a former Spencer Stuart CEO and chairman. Several years ago, he says, retiring or other outgoing chief execs played a background role in anointing successors.
But that's more an exception than a rule these days. Ogden says independent boards prefer to tap their own CEO candidates. They tend to ignore the advice of exiting honchos.
Ogden says heightened board involvement is good for companies. But it's made screening CEOs more complex.
Even in tough hiring climates like this, Ogden says there are ways to ensure that companies place the right CEO at the helm.
Benchmark Talent
He says the way to do this is by benchmarking talent, taking risks with promising candidates and getting a head start on the CEO selection process.
"You need be creative about sources of talent for CEO positions," Ogden said. "Nobody needs all the cards in an ideal CEO playing deck."
Even so, the managing skills demanded of today's CEOs are formidable. And it's becoming harder to find CEO candidates who meet the new criteria.
New skills include a knack to interact directly with a wider business audience than ever before. Wannabe CEOs must also tolerate intense pressure and scrutiny from regulators and shareholders about how to run companies. They must also serve as ethics policemen.
There's little leeway. Newly empowered boards, rigid regulatory rules and zero tolerance for unethical behavior in the executive suite are continuing to pressure CEOs and shortening the tenure of many.
According to Liberum Research's management change database, there were 91 CEO-related changes at U.S. public companies in the first half of July. Most changes were in the manufacturing, banking and drug/biotech sectors.
"There's a huge amount of turnover," said Richard Jacovitz, Liberum's senior vice president and director of research .
The new skills demands are altering the profile for new CEOs at S&P 500 companies.
New CEOs Younger
For one thing, they tend to be younger than their predecessors -- often by ten years or more.
"It's an energy issue," Jacovitz said. "Younger CEOs can act more quickly in today's changing business climate."
Spencer Stuart studies show that the median age of a CEO in the S&P 500 dropped to 55 in 2007 vs. 56 in 2002.
CEOs who have stuck with one product or service path careerwise are also declining rapidly.
Only 9% of S&P 500 companies had CEOs that stuck with one functional business path their entire careers in 2007, Spencer Stuart said. In contrast, 18% of Fortune 500 companies had one-track CEOs in 2002.
With the graying of the Cold War generation, Spencer Stuart also found that CEOs with military experience are all but extinct.
Only 8% of CEOs in the S&P 500 had served in the armed forces compared with 14% with such experience in Fortune 500 companies in 2002.
On the other hand, CEOs with smarts in international markets are on the uptrend.
Thirty-seven percent of S&P 500 CEOs had global experience in 2007 vs. 20% with such expertise in Fortune 500 companies in 2002, Spencer Stuart says.
There's also no way these days for new CEOs to duck time spent with the board.
While CEOs eight years ago could get away with four or five board meetings a year, they now face constant scrutiny from directors. They must meet continually with them. They must also meet regularly with top human resource, finance, legal and technology managers at their companies.
But there are ways to satisfy the hiring and job demands placed on new CEOs by boards and ultimately -- investors.
Ogden says the trick lies in putting together the best possible mix of inside and outside candidates for the CEO spot.
Since most boards tap pools of internal and external candidates when choosing CEOs, he says the key is to carefully benchmark these insiders and outsiders. "The idea's to ensure you're choosing from a pool of the most talented people given your vision for the company," he said.
Ogden says key markers are breadth of experience and if candidates come from outside companies with set or flexible corporate cultures. He says it's tough for folks who have set business habits to graft themselves to new companies. Knowledge of ethics and legal rules can be a deal maker, Ogden says.
Where the retirement date of a serving CEO's known well in advance, Ogden says it makes sense for boards to get involved anywhere from two to three years before a transition occurs.
"You have to get the bricks in place so that succession is a well-planned, orderly process," Ogden said.
No Perfect Candidates
Boards selecting new CEOs must also be prepared to take some risks, Ogden says.
"Nobody hits all the key criteria. You must be prepared to make some trade offs," Ogden said.
He says large, diverse companies like General Electric GE and United Technologies UTX are rich sources of CEO candidates who meet the new criteria. They have units spread across many industries and boast hundreds of general-manager jobs where fledgling CEOs can cut their teeth.
"These companies test young people in their 30s by putting them in charge of $200 million to $300 million business units," Ogden said.
He says strong managers aged 38 to 58 who hail from big corporations like this occupy the catbird seat in today's CEO market.
"There's a shortage of great, CEO-ready general managers," Ogden said. "As long as that condition exists, it's a simple demand equation. The good guys are in huge demand."
