Some of the best companies in the U.S. have failed, very publicly, to rigorously check references on CEO candidates to ensure that they are the right fit for the company's challenges ahead. Yahoo learned this lesson the hard way last week when it was revealed that their CEO, Scott Thompson, padded his resume.
Now Yahoo (YHOO) board member Patti Hart, who led the executive search that resulted in Thompson's hiring, plans to step down from the board. For the more than 4,000 executives currently serving on Fortune 500 boards, or considering joining one, these events concerning Yahoo should be a wake-up call.
When these issues are not surfaced before the CEO is hired, the result can be both public embarrassment – for the company and the executives from other companies that serve on its board – and a jolt to shareholder and employee confidence in leadership. And checking academic pedigrees is the easy part. The more difficult challenge is getting the hard data from the market to ensure that your CEO pick is right for the job. Just look at Hewlett-Packard (HPQ), where shareholders were stripped of 40% of their stock value under Leo Apotheker last year. One HP director recently told us that Apotheker had been "sold to the board" and "that won't happen again."
Similar misfires have happened not only at Yahoo but also at companies like Motorola (MSI), Coke (KO), and Procter & Gamble (PG). When the wrong person is picked, recriminations and questions immediately begin with, "Why didn't we know this before?" The best companies put in place systems to ensure that they do. P&G, for example, was highly successful the next time around because it dug deeper into the organization and based CEO selection on better information, which led to the selection of CEO A.G. Lafley.
Many companies make a final hiring decision with too little information and too much delegation, and rely too heavily on third parties to get the job done. Fortunately, there is a great deal that can be done to improve the process.
Companies must go beyond superficial referencing to determine what a candidate can contribute and how he or she aligns with the future imperatives and culture of the company. But unlike referencing for other senior executive positions, referencing for CEO contenders is tricky because in many cases the person up for the job has never been a CEO before.
Here are three ways in which companies can avoid a Yahoo-like debacle:
Make sure the board is involved
Patti Hart's departure from Yahoo's board underscores a crucial point: Hiring the CEO goes to the heart of a board's fiduciary duties, so it makes sense that referencing begins and ends with the directors. Even when working with a third party, such as a search firm, boards should never completely hand off the referencing process. Directors should be a check on referencing, especially if they have a personal relationship with a reference. If a board is going to rely on a third party to take care of the referencing process, as many companies do, the directors need to make sure that that group can get the "inside scoop" on how a candidate leads. We've seen the consequences of boards that relinquish control of the referencing process. It's not pretty.
