An Organizational Leadership Transition Conundrum

In hiring, should the potential negative effect of not being chosen on internal candidates be weighed by search firms?

A friend of mine brought an intriguing problem in ethics and organizational management to me and I (she also) would appreciate reactions from those RBCers with relevant experience. I am changing a few details so that the situation is not recognizable to those familiar with it, but here is the gist.

My friend’s uncle retired two years ago after many years of leading a large international business. In the search for his replacement, there were three internal candidates: The two VPs and one other person just one rank below them. They were all talented individuals who had contributed to the firm for years.

However, an extraordinarily well-qualified external candidate got the job. My friend and her uncle agree that this fellow is a superlative professional. If ability for the head job could be rated on a 1 to 10 scale, he would be a 9 or a 10, whereas the two internal VPs were about an 8 and the other internal candidate was about a 7. Looked at solely on the dimension of individual ability, the search firm did an excellent job. But there is more to the story.

Within three months after the decision was made, both VPs had left the company. One was recruited away by a rival company with this pitch: “Clearly, your current firm doesn’t value you, but we will, so come work for us instead”. The other became an independent consultant because she concluded from her failed effort at promotion that a woman could never ultimately garner the top job in the boys’ club of big business.

The third candidate stayed, but his work performance and morale have deteriorated. He used to be the kind of guy who worked on weekends and evenings; now he is competent but always leaves for home at 5:00 pm on the dot. When asked, he says he didn’t expect to land the President/CEO position but was shocked that the two VPs, both of whom he admired, were passed over. Other people at his level who did not apply have moved on to other companies in the past two years, grumbling that the firm does not reward long-term loyalty and service.

Despite the obvious skills of the new CEO, the exodus of knowledge and talent at the near-top and the broader morale decline has hurt the firm, which has lost money two years in a row for the first time in its history.

Accepting for the sake of argument that in the abstract the person with the most ability got the job, my friend’s question is this: Was the right decision made? That is, should organizations weigh in their leadership hiring decisions the potential negative impact of being passed over on valued internal candidates (and other internal workers who are not candidates but closely watch the decision process) or should they just ignore that potential cost and pick the individual who is the strongest candidate in the abstract, irrespective of whether they are internal or external?

Author: Keith Humphreys

Keith Humphreys is the Esther Ting Memorial Professor of Psychiatry at Stanford University and an Honorary Professor of Psychiatry at Kings College Lonon. His research, teaching and writing have focused on addictive disorders, self-help organizations (e.g., breast cancer support groups, Alcoholics Anonymous), evaluation research methods, and public policy related to health care, mental illness, veterans, drugs, crime and correctional systems. Professor Humphreys' over 300 scholarly articles, monographs and books have been cited over ten thousand times by scientific colleagues. He is a regular contributor to Washington Post and has also written for the New York Times, Wall Street Journal, Washington Monthly, San Francisco Chronicle, The Guardian (UK), The Telegraph (UK), Times Higher Education (UK), Crossbow (UK) and other media outlets.

55 thoughts on “An Organizational Leadership Transition Conundrum”

  1. Eh, it’s the wrong question. Ability, especially at the level we’re discussing, is not something you can rate with a single number. The ability to lead large organization involves a whole range of capabilities in a variety of different disciplines.

    In this particular case, it’s clear that the hiring decision was the wrong one. If valuable people are walking out the door and others feel demotivated and the CEO isn’t doing anything to remedy this, then it’s clear he just isn’t very good at his job no matter how much “ability” he might have otherwise.

    1. The ability to lead large organization involves a whole range of capabilities in a variety of different disciplines.

      That CEO’s have super-human powers is one of the great flimflams of our times.
      It is an asymmetrical information war waged on schnooks and schmos.
      In essence: A con to justify outrageous salaries.

      I am looking forward to the day when AI takes over this role and we can be done with this ridiculous hero worship of the banal.

    2. Looks to me as if the new CEO is clearing the decks of potential rivals. Demotivating the entire C-suite is not something that happens by mistake.

    3. I do not believe the root of the problem is the hire. By all accounts, it seems the competency level and fit were right. Where hiring managers at all levels fall short is the feedback they provide both internal and external candidates as to WHY they were not the chosen individual. The real problem is feedback and communication. Talent needs to be retained, nurtured and developed. The hiring process is not only about an open position, CEO or other. It is about the entire process meaning all candidates. Interviews and feedback are extraordinary coaching moments. Sadly, few hiring decision makers are really trained themselves in how to manage candidate expectations and rejection.

  2. This is not a question of ethics. As a matter of business, internal people should not be passed over lightly for the morale problems you illustrate.

  3. Going to use some buzzwords, but the question is whether employment is transactional (you pay me, I show up) or aspirational (we are working together to accomplish somethin). Why the CEO thought that people at that level are operating in the first mode rather than the second is beyond me, but the lower ranking employees realized immediately that this was the case. The incoming CEO should have realized the challenge and addressed it. The outgoing CEO should have realized the problem and addressed it. Neither will likely admit that they failed (hence the question at all); instead, they want to blame the people below them (for insufficient loyalty, insufficient understanding, lack of integrity, etc.).

  4. To amplify tomtom’s comment, qualified internal candidates should be passed over with the expectation/understanding that, of course, they will leave.

    1. This is correct in my experience as well.

      The issue today – on a larger scale – is the transition away from loyalty in corporations. I suspect this is a feature, not a bug. Nonetheless, you should know that if you pass over internal candidates, they should be expected to go. In private and public sector. That is reality. The two folks that left are a clue, as is the person who stayed and is now enjoying his family (finally).

      On the flip side, it is an unwritten expectation these days that you go the extra mile – look at all the people left in firms who “pick up the slack” (the work of those laid off) with little or no pay raise because the market is tight and there is nowhere to go. This is one reason IMHO why firms hire younger people – they haven’t yet learned not to kill themselves for nothing.

      The Genius of Capitalism.

  5. Hmmm… I was bracing myself for an atrocious pun, but that was not forthcoming. Hoping that actual experience in organizational management is not a strict prerequisite for posting, I suggest this:

    It may be possible to frame a question thus: should high-level hiring decisions be approached as univariate problems in which “ability” is the single independent variable which is associated with “organizational function,” or should the decisions be approached as if they required models with multiple variables, with ability being one of the most important, but not the only one? What other variables should be included in the model, and should they be entered as main effects only, or are there likely to be interaction terms in the final model?

    From this example, it would appear that other variables should have been included in the decision, and that “ability” at the top interacts with other variables related to organizational function. This does not mean that you really construct statistical models, but you do think about the messages that you send when you make your decision, what responses those messages are likely to elicit, and whether the effects of these responses are likely to have “coefficients” as large or larger than that for “ability” considered by itself.

    The “ability” of the new CEO had to be estimated from what was observed at his old position at his previous company. This “ability” was probably a function of several variables related to how the old company functioned, That is, his “ability” was a contextual variable, and was not an “intrinsic property” of the individual hired as the new CEO. Perhaps he had been a VP at his old company, well known to all who worked there, and it is also likely that his appointment had been seen as fair and appropriate at that old company. Perhaps multiple variables were included in predicting his success there. The decision-makers at his new company should have considered the new CEO’s success at his old firm in terms of multiple variables when considering his hire.

    1. This is very thoughtful Ed. It does in a way seem unfair to the external candidate, in that whether there are internal candidates and how they will react to not getting the nod carries the day, rather than whether the external candidate is good or not. In contrast how external candidates feel about not getting the job does not influence the prospects of internal candidates.

      Not that one would have to or should be this blunt, but it would be a strange phone call for a search committee to make to an external candidate to say “You are more talented than Bill, but we hired Bill because he would be really upset if we didn’t”. An external candidate might respond: Why did you waste the time of external people by advertising the position! But I guess thems the breaks.

      1. I am on the search committee for a senior level VP on our campus. One of the questions we were asked by some (not all) of the long-list candidates (we did phone interviews) was about internal candidates. Some of the candidates who asked removed themselves when they were told that there is an internal candidate. Others didn’t care enough to ask, or were reassured when we told them that (to the best of our knowledge and by our directions from the President) the search is legitimate, no preference was going to be given to internal candidates.

        Our Regents have instructed the President to begin “succession planning” for senior administrators. The President has made it clear that we will continue to do national searches, but that he wants internal candidates to be ready to take over.

        I’m not sure how this works (especially at the top) in a public University where searches (and especially Presidential searches) have procedures mandated by the State government.

      2. For a host of reasons, many illustrated above, the decision to search outside should only be taken after the plausible internal candidates are rejected. An organization desirous of loyalty must demonstrate it first. Searching outside an organization communicates clearly through the ranks that it’s your ability to schmooze with the search committee that counts, not your record of loyalty, not your relationships with your customers, etc.

        The military has as least as good a record of hiring people for the top jobs as the Fortune 1000 and academia. And they don’t get to look outside. The free agent CEO is one of the great scams of modern America, right up there with college football coaches and network news puppets.

  6. If the internal candidates had been a 6 on your scale there would have been more justification. The other problem with an outside CEO is they can often prefer candidates from their old firm (with whom they’ve worked before) over candidates from the new firm when top level positions opens up. That is one factor in the moral decline.

  7. As a lifelong slacker, I lack the relevant experience you asked for, but…

    Who made the decision to hire? I assume it was a board of directors — how close are they to the company’s daily operations?

    During your friend’s uncle’s term as CEO did the company have a policy of internal promotions or outside hires?

    It appears that unmet expectations at the executive level mirrors what I’m used to seeing at much lower levels, where employee morale isn’t considered in management decisions.

    For the record, I’ve always been a proponent of internal advancement whenever feasible (in spite of — or perhaps because of — my executive inexperience).

    1. I don’t know the company’s prior policies, but in any event I was more curious what people thought about the general principle which would be applied ex ante.

      1. You have a near consensus (based on prior knowledge of a negative outcome, but probably genuine — most non-bosses don’t want their promotions ‘stolen’ by outsiders).

  8. As one who has never had aspirations to become Archbishop, I can only offer the perspective of one who has experienced numerous changes in leadership over several decades. Several observations:
    1) How the new leader behaves is far more important. If a new person comes in with a “new broom sweeps clean” attitude and begins to rearrange the deck chairs without engaging the staff in a substantive way, no one should be surprised if turnover increases — at least in those who have reasonable prospects in the current job market.
    2) If the new leader was promoted from within and their sole redeeming feature is being in a romantic engagement with the supervisor who made the decision, turnover can be expected to increase — at least in those who are a significant number of years from retirement.

  9. The other comments have addressed the point about morale. If the Board or both the outgoing and incoming CEOs did not see that the exodus would occur they were deficient.

    There is another factor that may be in play. Companies do not rate their employees, at any level, the same as external persons. I would not be surprised if an objective assessment of the two VPs rated them equivalent to or better than the new CEO. In my experience, both as a consultant and employee, when consultants are brought in their recommendations and advice could have been obtained at least 50% of the time from internal sources.

    Bluntly, someone blew this one.

    1. Companies do not rate their employees, at any level, the same as external persons.

      This is an important point, and it need not imply that either is wrong. That is, the value of the poached VP may have been greater to the company that poached him than to the company that lost him. But at the same time the company might have valued that employee more if they knew he was going to be working against them as opposed to just for example retiring or switching to a different field.

    2. I agree that rating insiders is different from rating outsiders. The thing about the job of CEO is that the results the CEO produces are not personal. They are organizational. Replacing the CEO or any organization is first and foremost a critical strategic management decision.

      The ONLY reasons to reach outside the organization for a new CEO are 1. the organization as it currently operates is failing and needs a sharp jolt to change the structure and atmosphere of the organization or 2. the organizational environment is rapidly changing in directions the current management does not have the experience or social networks to deal with and the outsider brings such experience and talents to the table.

      I have to ask if this organization had in place and functioning a planned system of replacement for a CEO who died or left the job for any reason. Someone should have simply been ready to step into the CEO job immediately. The senior managers and board members should have considered the need far in advance and been ready. Presumably, this plan did not exist, which is already a major strategic failure of the organization itself.

      Both the lack of an existing and implementable plan to replace a CEO and the fact that the morale effects of bringing in an outsider as CEO were not considered as part of the decision suggests that this organization was poorly managed at the strategic level and was already going to have severe long-term problems.

    3. = = = There is another factor that may be in play. Companies do not rate their employees, at any level, the same as external persons. = = =

      I absolutely agree with that point, and despite having written the analyses necessary to obtain an MBA back in the “blowing up the corporation” days I’m a big proponent of long-term continuity and deep internal knowledge and understanding. Often what is labeled legacy thinking or ‘tribal knowledge’ by the outside consultants is what makes that organization different from its peers and allows it to compete over the long-term.

      That said, there is also a case for fresh outside leadership. I’ve worked with a number of small- and medium-sized manufacturing firms over the last 20 years and some of them have been simply unable to progress from the 1950s organizational and business practices of their founders – very extreme examples of what Diane Coutu has termed the anxiety of learning. Sometimes the only way to get things moving is to bring in an outsider who does _not_ know the people, the history, and the internal processes (and who is generally a bit bloody-minded) who can effect substantial change. The internal candidates who leave might well end up doing the same thing at another firm when they were unable to do so in the one where they grew up. So there are multiple factors to consider in making the choice.

      I’ll echo the comments above that if the Board / family / executive decisionmakers did not see the departures of the passed-over staff coming as a result of their choice then THEY need to perform some serious self-examination. This is 2014, not 1964: after being told for 30 years that they are responsible for managing their own careers capable people are going to do just that when events turn in a direction not congenial to themselves. It seems that many organizations want the benefits of both 1960s-style loyalty and 1990s complete flexibility (= firing whenever they desire), which is ludicrous [which is not to say I don’t see that combination thinking a lot in the Midwest, because I do].

      Cranky

  10. You missed it. The problem goes well beyond this particular search and you even hit the nail on the head when you said,

    “Other people at his level who did not apply have moved on to other companies in the past two years, grumbling that the firm does not reward long-term loyalty and service.”

    If they had hired one of the internal candidates it may have helped, but the problem precedes this situation.

    1. OzarkHillbilly: You are misreading the text. The former CEO stepped down and was replaced two years ago, the exodus did not precede that.

      1. I can’t speak for OzarkHillbilly but it seems to me that environment or culture that resulted in the decision to pass over the internal candidates is a critical factor that needs to be examined because it obviously contributed to the one particular decision that we’ve been discussing. I thinks it’s a mistake to look at this hiring decision in isolation.

        You have a board and CEO that are evidently out of touch with the feelings and expectations of their subordinates. They also seem unsure of their own judgment in assessing who they want to run the business or else the atmosphere was so poisoned or polarized that they were forced to pass this most important decision to strangers who could not possibly be as knowledgeable about their company of their industry.

        Others have raised the question of whether there was a plan of action in case the then existent CEO left or became incapacitated. If there was such a plan, surely the replacement named in the plan would be the incontestable successor of choice? But if there either wasn’t a plan or if the designated successor was considered unsuitable, doesn’t that highlight a serious deficiency and suggest the real management problems likely predated (and perhaps made inevitable) this particular decision?

        Yes, the exodus took place after the new CEO was hired but it seems to me that the real problems did indeed predate the hiring decision that was its immediate trigger.

    2. Counterpoints:

      1) In any structured organization the majority of employees will never progress beyond 2nd-line manager, as there simply are not enough positions for them to do so.

      2) No one ever believes the Peter Principle or the Dunning-Kruger Effect applies to themselves, but sadly it does apply to almost all of us [1]. So there are always going to be a lot of people angry they didn’t get the big promotion but not understanding why that was so.

      No matter how profitable, well-run, and loyal an organization may be there is always an infinite supply of discontent to be tapped.

      Cranky

      [1] 99% of the readership of Same Facts excepted, of course

  11. Was the right decision made?

    The only way to decide whether a decision of the Board of Directors was good or bad is to look at its effect on profits. Since you don’t say whether the net effect of the personnel changes, including the resignations, was an increase or decrease to profits, you haven’t provided sufficient information to answer the question.

    should organizations weigh in their leadership hiring decisions the potential negative impact of being passed over on valued internal candidates (and other internal workers who are not candidates but closely watch the decision process) or should they just ignore that potential cost?

    Never ignore any potential costs. Profit maximization depends on weighting all of the costs as well as all of the benefits.

    1. you don’t say whether the net effect of the personnel changes, including the resignations, was an increase or decrease to profits, you haven’t provided sufficient information

      Reading directly from my post: …the firm, which has lost money two years in a row for the first time in its history.

      1. I also missed that statement. In which case the exodus of the existing senior managers should have been anticipated and may have been a favorable result of bringing in the outsider. The complainers are just bad-mouthing the company after the fact to avoid taking personal blame for the failed strategic management they participated in. In any case, bringing in the outside CEO was a strategic management decision rather than just a personnel decision.

        1. OK. Upon rereading the statement “Despite the obvious skills of the new CEO, the exodus of knowledge and talent at the near-top and the broader morale decline has hurt the firm, which has lost money two years in a row for the first time in its history.” that statement suggests to me that the loss of money was a result of the CEO change rather than a cause. If the losses preceded the CEO change I would have analyzed the situation differently.

  12. How was the search firm’s compensation effected by choosing an outsider over the others?

    Alternatively, was having a search firm in the first place likely to lead to an outside candidate being presented as “more qualified” than the insiders, to justify the search firm’s employment?

  13. Scenario one: Company is losing money and highly-paid executives have gone. Board can talk stockholders into selling the company–unlike when it was making not as much profit as they wanted.

    Scenario two: Company is losing money now, and may never gross what it did, but when it gets its stuff together it is only paying about a third what it was paying into its executive suite. So it can profit on a lower gross. Sort of like breaking a union, but at the other end of the payscale.

    1. Neither scenario would seem to be the case here. The company was making good money and, although it wasn’t mentioned, I think it’s safe to assume that the “superstar” hire would be paid as a superstar which is to say considerably more than the plain vanilla internal candidates. So, probably paying the new CEO way more and now losing money. Just an all-round crappy decision which produced crappy results.

  14. First of all, with no explanation of market challenges the company was facing at the time of the resignation of the long term president and those that may be occurring now, it is difficult to ascertain all the factors underlying the profit decline. Nevertheless, it would seem that both the board and the former president failed to fulfill one of their fundamental responsibilities that being leadership development and succession planning. One key element in the description of the situation is that the retired president had held the position for a long time. That implies that his retirement was predictable and could have been planned for. If internal staff lacked some capabilities, that lack should have been addressed in some fashion years before the retirement, either through training and development of existing and/or by bringing in talented new junior staff. Additionally, a key responsibility of the new president would be to retain the human capital embodied in the long term staff,a fundamental responsibility at which he evidently failed. Apparently he/she was not as talented and capable as initially believed, an observation consistent with those who note the multi-dimensional nature of talent.

  15. I’m reluctant to pass judgement knowing the outcome, but a few observations.

    First, the non-VP who did not expect to get the job, and who presumably was not upset about not getting it, still chose to go into a passive-aggressive funk. This tells me he was not CEO material. The fact that the retiring CEO, who probably wrote the short list and knew this guy well, included him gives me some doubts about the CEO’s judgement. Also, with two VP slots open, I would think that a guy who was considered for CEO would move up rather than tune out. Perhaps the new CEO is a better judge of people.

    As far as the VP’s leaving, this is fairly common when people lose the CEO election. If the goal is to be CEO, then it is time to look elsewhere. Also consider the situation where one of the VP’s gets the job and is now the boss of a former peer. Such situations often work out poorly, so losing one VP was probably unavoidable.

    Also, the fact that both VP’s left could be an indicator that the new CEO is actually fairly good. If he was terrible, the best VP strategy would be to wait for the board to dump him. If, on the other hand he is good, then he isn’t going anywhere soon and it is time for the VP’s to look outside, assuming CEO is the goal.

    In my experience, outside executives are hired in part for whom else they can bring in. So choosing one is a clear message that further turnover down the ranks is desired. Most senior people understand this and act accordingly.

    The one thing we don’t know is the business outlook at the time of the hire. If things were OK, then this was poorly handled. If trouble was already on the horizon, who knows, maybe the new guy kept it from being worse. Hard to say.

    1. the non-VP who did not expect to get the job, and who presumably was not upset about not getting it, still chose to go into a passive-aggressive funk. This tells me he was not CEO material.

      We don’t have enough information to know that. He may just like it there and has given up trying for that last promotion.

      1. To some extent, we are all guessing here, but your explanation of his behavior is perfectly reasonable. He may even be optimizing his personal situation.

        My point has to do with his leadership skills, critical to being a CEO. Think about the example for the people below him. Will they be inspired by his reaction to a setback? How is a guy who shuts down in the face of adversity ever going to lead a large organization when the going gets tough? He might be a capable guy, but he is no CEO.

    2. = = = First, the non-VP who did not expect to get the job, and who presumably was not upset about not getting it, still chose to go into a passive-aggressive funk. This tells me he was not CEO material. = = =

      IMHO we should note that that analysis is based on cultural attitudes towards work (even work at the executive level) which are common in the US and Japan, not so common in the UK, and deprecated in Germany (four economies which produce very similar economic outcomes with substantial variation in thinking about e.g. work hours).

      Cranky

  16. Choosing a new CEO on a guess about personal quality wronged the people who had earned a shot at the job by faithful service. Perhaps a cynical and short-term-oriented Board might have felt justfied if doing so gave the firm a great performance boost. Obviously, it did the opposite, so in additiona to having acted like scoundrels the board members have been shown up as fools. As Michael Walzer used to say, there is neither honor nor profit in doing evil badly.

  17. should organizations weigh in their leadership hiring decisions the potential negative impact of being passed over on valued internal candidates (and other internal workers who are not candidates but closely watch the decision process) or should they just ignore that potential cost and pick the individual who is the strongest candidate in the abstract, irrespective of whether they are internal or external?

    Simple question. Of course they shouldn’t ignore the possible secondary effects of their choice. The responsibility of the board, or whoever made the final decision, was to maximize the effectiveness of the organization. If that meant choosing a (maybe slightly) worse internal candidate, then that is what they should have done.

    Hiring a CEO is not the same as awarding gold nmedal in diving or gymnastics. It’s not an abstarct exercise in deciding who is the “best” candidate. It’s an exercise in making the best decision for the company as a whole.

  18. Well, in the fog of uncertainty of the particulars of the situation (as has been pointed out by a number of the commentors above) I can’t say that I would “defend” the decision made here. Who knows if it was right or not (incidentally I find the fact that financial performance slipped in the wake of the decision to be weak evidence indeed – lots of things impact the financial performance of complicated enterprises operating in competitive markets – perhaps the departure/demoralization of several longstanding senior executives was the primary cause, perhaps not).

    But I can offer a few thoughts on ways in which such a decision might well be defensible.

    First, we are provided with no information on the specific responsibilities and backgrounds of the three passed-over candidates. But given that they are all longstanding employees, we can presume that none of them has been a CEO of a large business. This matters a great deal, as CEO is a job with a very unique set of demands relative to other positions – even senior executive positions – within a firm. It is sometimes the case that strong CFOs or strong COOs are promoted to CEO positions and do quite well. But it is by no means a sure thing. If the #2 executive within a particular function within a company is quite strong, then most of the time he or she can be promoted to the #1 position within that function and be expected to do quite well. So if a company has a strong Controller or Treasurer, then promoting that person to the CFO role is genrally a high-odds bet. But CEO is a specifically and uniquely cross-functional role. An exceptionally strong CFO may have no material experience with operations, with marketing, with sales, etc. Similarly, an exceptionally strong COO may have no material experience with finance, with marketing, with sales, etc. Even an exceptionally strong Business Unit President (i.e. a general manager with cross-functional experience) may have no material experience with corporate portfolio strategy, capital allocation, M&A, capital markets issues or dealing with a Board of Directors – all key duties of a CEO.

    If the outsider in this scenario were the CEO of another company then he or she has experience that is relevant, valuable, and highly unlikely to be possessed by any insider – even an insider of exceptional longevity or skill.

    Second, I fail to see how this is a significant moral issue. We are told that this is a large international business. The passed-over candidates sit one and two levels down from the CEO on the org chart. They are, in all likelihood, extraordinarily well compensated executives in their own right, used to making hard decisions on people and granted much greater control, flexibility and autonomy than 99%+ of the employees in the firm.. Or as we sometimes say, “big boys and girls.” This isn’t a scenario in which a loyal but under-appreciated middle manager is passed over for a promotion within his or her department that would have opened the door to better family vacations or the prospect of being able to build a bigger and more secure nest egg. This is a scenario in which a few already extraordinarily successful execuitves, who presumably are welcome to remain in highly compensated and highly attractive jobs for the foreseeable future, are passed over for a position that by definition only one person can hold. CEO positions aren’t some sort of seniority-based reward for loyal service. They are positions of great responsibility, influence and impact that nobody – nobody – “deserves.” Does anyone think that a political party has a moral responsibility to nominate for the Presidency the primary election candidates with the longest track record of service in the Senate?

    Third, while it is true that employees – including senior execuitves – often work for a much broader set of reasons than simple financial reward (pride, accomplishment, dedication to the mission of the organization, etc.), and thus it can be detrimental to the culture of a company, and thereby to its performance, to erode the bonds of trust and loyalty within the company by bringing in outsiders for too many key roles, it is simply not the case that behavior at the opposite end of the spectrum is necessarily optimal. I’m guessing that most of the folks commenting here would ascribe negative connotations to the term “old boys club.” But the term “old boys club” describes situations in which in-group loyalty and longevity of relationships, rather than merit or the ability to innovate, are used as the basis for doling out prestige, power and wealth. There are situations (not necessarily common but nonetheless quite real) in which it serves the long-term health health of an organization to break up patronage networks and the expectation that “next in line” people have a God-given right to wield power. Even if in the short term that results in much of the old guard losing the energy.

    1. Although I agree with most of the points you make, I don’t think that having experience as a CEO is necessarily as important as you are making it out. What’s more, it seems to me that simply saying that having such experience as a CEO is essential may be too simplistic in light of the many different and possibly inapplicable factors that contributed to his successes in his previous company. I would call attention to something that Ed Whitney said in an earlier comment:

      “The “ability” of the new CEO had to be estimated from what was observed at his old position at his previous company. This “ability” was probably a function of several variables related to how the old company functioned, That is, his “ability” was a contextual variable, and was not an “intrinsic property” of the individual hired as the new CEO. Perhaps he had been a VP at his old company, well known to all who worked there, and it is also likely that his appointment had been seen as fair and appropriate at that old company. Perhaps multiple variables were included in predicting his success there. The decision-makers at his new company should have considered the new CEO’s success at his old firm in terms of multiple variables when considering his hire.”

      It may be very likely that the circumstances and people at his previous company made a much greater contribution to his becoming a “superstar” than is apparent at first glance. I wonder whether the outgoing CEO and the board considered the point Ed made when they evaluated the external candidate.

  19. Speaking as someone who is frequently involved with these sort of decisions, within businesses, i would agree with those above who say that both the value of internal experience and the effect of the change on the workforce are integral to the decision. Organisations are associations of human beings and not machines, therefore, for example, knowing that Mike dislikes Bob because of an issue between them years ago is a relevant part of the job’s required knowledge/skills base, which takes a long time to acquire. Internals in a successful business should therefore be preferred.. In this case if there are two strong internal candidates, there would only be three reasons to pick an external candidate: 1. The external is still way better (at least 2out of 10 better, probably 3/10)’, 2.the place needs a shakeup, as it is a bit stuck in its ways or 3. The external (as Stephen suggests) could be a proven CEO and the internals not. None of these criteria seem to be met in the story above.

  20. The short answer is that of course the board of directors should attempt to factor in all of the variables — including “soft” issues such as morale and loyalty — when making a decision about succession. The only thing I would add is that if the organization is running smoothly and satisfactorily, the appointment of an internal candidate will probably help create a sense of continuity. If the organization is in crisis, the appointment of an external candidate can be used to signal a sense of urgency about the need to change.

  21. Another factor, which was alluded to by a couple of people above, is the expectation that the newcomer will want to bring his own people in as soon as possible. Having been through that situation myself (though at a somewhat lower level than VP/CEO), I saw what happened when an outsider was brought in over me. Even though I agreed completely that the outsider was more qualified than I was, and my own personal reaction to the announcement was to hope he would become a mentor from whom I could learn. Nevertheless, as soon as he arrived, he immediately began working to marginalize and discredit me, in order to create an excuse to push me out (he eventually succeeded, though only after putting me through a year of absolute Hell). Had I ever faced that situation again, my response would have been to start searching for a new position the day the new hire was announced.

    1. To expand a little further on my comment above, I guess the real answer to the question about whether the board’s decision was right or wrong, I guess what I am really saying is that a decision to hire an outsider should also factor in the expectation that most, if not all, of the immediate subordinates will probably also be leaving soon after. Either by their own choice or by the actions of the new hire. If that was the desired result, than I guess the decision was the right one. If however the board wanted and expected the subordinates to stay on, then their decision was wrong. Because that is entirely unrealistic. Morale and loyalty are not even the primary factors here, it will probably be impossible for them to stay even if they otherwise wanted to.

  22. If I was on the Board/selection committee I would have asked if the company needed to take a new direction. If so, then looking outside would make sense to get some fresh ideas and new thinking. However, there’s not enough information in the situation summary to know what factors were considered in the selection process. It appears the company was doing well, so it’s possible continuity should have been the primary concern and the selection biased in favor of internal candidates.

    Some attrition would be expected in any event, regardless of who got the job. If one of the internal people got promoted, the others may believe they have no future in the company.

    It’s also not clear if the candidates who did not get the job were given an explanation of why they did not get the job, and why the successful candidate was selected. This is a tough discussion to have, but it is necessary to help develop people who aspire to higher office.

  23. There’s an implicit assumption in the story that the other candidates left because the eventual hire was external. Is there other evidence to support that assumption? It seems equally plausible that unsuccessful candidates would have drawn the same lessons – that they weren’t highly valued in the organization, that there was no reason to push themselves for a role that didn’t exist – even if one of the internal aspirants were chosen. After all, the impact would be the same, and the people in question are likely to be competitive, driven, and ambitious.

    Another question I’d want to consider – are there other “8”s in the organization that could step up to take the place of the departed VPs? If there’s other talent in the company, it may not be necessary to optimize just for the candidates who left.

    1. Obviously we don’t know the particulars but it seems to me that if the succession was the “natural” one then probably the subordinates wouldn’t be disheartened by the internal promotion. There is a sort of a “natural order” where when somebody moves up, he or she takes their people with them and (depending on competency) others move up to fill the vacant spaces and a certain stability is achieved even as there is change within the organization.

      Again, even if there were other “8’s” they probably wouldn’t be demoralized if everybody moved up in accordance with expectations. On the other hand, one could reasonably expect a fairly wide swath of the “executive” level people becoming concerned that the relationships that they were counting on for the future had probably become, if not worthless, then certainly substantially devalued.

      What’s more, the decision by the new CEO to seek out and elevate these new “8’s” becomes fraught with danger as it is possible that reaching down through the ranks and jumping qualified candidates over their existing superiors could be even more disruptive and demoralizing than even the decision to hire an outside “superstar”. That might be necessary in a dysfunctional, failing organization but it’s daylight madness in a successful one.

  24. Rating the candidates as you have done is a head-hunters cop out/sales pitch approach used successfully on frightened Boards. (This is the most important and one of the few real operational decisions a director faces when sitting on the Board of an on-going successful company. Without a long term succession plan/heir-apparent the Directors will be scared.) The recruiters make tons of money on external CEO placements.

    Placing outsiders in senior (esp. CEO) positions in large organizations carries high risk. If the organization is failing and needs a shake-up then taking that risk may be warranted. Otherwise internal candidates trump outsiders every time. The morale issue is only one of many.

  25. Among the things we don’t know is what the firm’s internal rhetoric was prior to this hire. That seems relevant in relation to the expectations/reactions of the people who were passed over. At a place like GE, one in ten expects to get the ax yearly; another outfit may stress common goals, we’re-all-in-this-together, happy talk like that. Related, what was the promotion/hiring pattern up to this point? Everybody at the senior levels would have known that very well, and if there was no real internal rhetoric, that would have formed an important set of expectations. The retiring CEO’s management style would have been another important guide, especially if he was a cooperative team-building type.

    It’s very telling that the board seems to have been surprised at the outcome (at least from the information Keith provides). That could easily mean that it was a happy-talk firm with a history of promoting from the inside, or that past practices and CEO style made that a reasonable expectation, and that the outside hire came as a bolt from the blue. So I agree with Former CEO that this board was cowed and frightened, or at the very least felt unequal to the task of picking someone. Board members, while often smart, are not always wise, and succumbing to prevailing fashion is always a temptation.

    It’s also surprising that the retiring CEO appears to have been surprised. Perhaps that indicates the same thing.

    Either way, I agree with others that lack of succession planning was a major mistake for which responsibility rests squarely in the laps of the CEO and board. It’s not always possible may not always be a good idea to have something like an “heir apparent,” but successful operations often groom at least one, and if it’s two or three, they do so in full expectation that the one/ones passed over will usually leave.

    Mainly, though, I do want to stress the importance of prior corporate culture and hiring/promotion patterns here, and their effect on the internal candidates’ expectations. At least the outgoing CEO, if not much of the board, should have had a very good idea what they were.

  26. Although there’s not nearly enough information here, it seems to me that the previous CEO and board made a terrible mistake in defining the scope of the abilities they were looking for. When you bring in an outsider to lead, “superlative” skills in managing an ongoing concern are only part of what you need. Equally important (and more important in the medium term) are really good skills at managing transitions, which the new CEO does not appear to have. The exodus and grumbling at the lower levels is — to me — particularly indicative here, because if senior and upper-middle managers are leaving, that means someone is going to be replacing those people. And if the replacements are a good fit (and mostly from within) the grumbling will lose volume rapidly. If the replacements are all from outside, or are internal candidates who weren’t well thought of, then more grumbling and more departures.

    At that level, “objective” measures of ability, especially seen from above, are not nearly as important as fit.

  27. “Other people at his level who did not apply have moved on to other companies in the past two years, grumbling that the firm does not reward long-term loyalty and service”

    This seems to me the clearest statement that what’s going on here is not mere career disappointment on the part of inside candidates and their supporters, but rather that these people are expressing a serious sense of personal betrayal. Something big has changed in their view of what the firm is about and what it wants from them. The female candidate’s reaction could be read that way, and certainly the #3’s actions say that loud and clear.

    Which, if accurate, does raise the question how far this is a generalizable case. Mulling over the details some more in the back of my mind, I’m reminded of something either Keith or James brought up in an earlier thread about firms that were historically family-run and deeply embedded in the community. If this is one of them, then it’s clear that even going to the search firm at all was a huge mistake, assuming of course that the directors and retiring CEO really intended to keep things going as they had been. But even in “ordinary” corporate Anglo-America, there’s a big question about the relationship between that move and past corporate practice. The search firm, as someone astutely pointed out up-thread, is the only clear winner here– lots of new business.

    Pure speculation, but how far off is it to guess that neither the retiring CEO nor the board of directors wanted to make a really difficult choice between two obvious and top-tier inside candidates, and tried to dodge it by bringing in the search firm? We have #3’s word that he’d have worked happily under either of the others; it could be that working relationships between the other two were good enough that both would have stayed (at least the male one, if there was one; not sure about the female).

    Anyway, maybe the really generalizable point could be that boards and CEOs really do have to earn their pay by leaning in to the situation. Too much else about this situation remains unknown, I think.

  28. This is a sad, but all too common, story and ethical problem. There is ample academic research that provides evidence that this happens on a frequent basis. Certainly there is a cultural benefit to hire an internal candidate, where possible and appropriate. When the internal candidate is as closely qualified as the explained in this story, I believe it is possible and appropriate. In my opinion hiring the internal candidate provides several benefits. First, it sends the message that the organization does value and rewards loyalty. Second, it will often have a domino affect, as the selected internal candidate’s position will be opened, and if an internal candidate is once again selected, the process continues. Third, there is generally a boost in morale and cultural energy as employees see “one of our own” being promoted and rewarded for his/her efforts. One consequence that boards, hiring committees, and HR departments should consider when selecting an external candidate over an internal candidate is the loss of the internal candidate. Frequently, internal candidate who have been passed over will leave the company within a few short months. Again, there are several reasons for this. First and foremost, it is now obvious they are looking for upward mobility and feel they are ready professionally and emotionally for the next step. So, when they are passed over, they will, undoubtedly, be looking for other options to move their career forward.
    Thank you for sharing this experience and once again confirming the notion that searching for and preparing internal candidates is certainly appropriate and brings great value to the company.

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