In our continuing series, Corporate Governance Expert David Beatty offers insights how boards of directors should select a new CEO.
How Does a Board of Directors Go About Selecting a New CEO?
David R. Beatty: Hiring a CEO is a sacred task of the board of directors. They are uniquely, solely, and only responsible for doing that. You think about the CEO, if you get it wrong, everybody is disadvantaged. Potentially, the company will disappear. But certainly, the employees, the customers, the suppliers, the communities in which you operate, everybody is going to be deeply impacted by the selection of a CEO.
What I think about when I’m worrying about this issue on various boards is two different functions to worry about. One is, what is the job difference between the CEO and everybody else? And the second is, what do we need now? Second one’s easier to answer, in a way. It’s, we need a cost-cutter. We need somebody who can get us into China. We need somebody who knows Biotech. We need somebody who knows AI. The externality functions are easy.
The inside one is difficult. To become a good CEO, you have to be great at communicating upwards to your board. You have to be great at communicating outwards to your communities. You’ve got to be exceptional making decisions downwards. You allocate all the capital in the company, for example. You also need sort of a certain amount of royal jelly so that you can energize and sort of help people feel good about what they’re doing, and get them involved and communicate effectively. It’s a very, very different job.
My experience is that most boards don’t do enough at it, and my motto is from a Greek philosopher Euripides, which is, leave no stone unturned. Take a look at tax returns. Did the person pay taxes for one year? Are they good corporate citizens? How about the last five? Take a look at references from people they’ve worked for and with. What do they say? And if you’d done that with one, why not do it with seven? We cannot afford to make a mistake. Selecting the CEO is your solemn responsibility and your unique responsibility as a board of directors.
David Beatty is an adjunct professor and Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management and a senior adviser to McKinsey. Over his career, he has served on more than 39 boards of directors and been chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.