Is executive retention a problem one might ask? From our own experiences in search, we felt it was. Educators and consultants alike have taken a more objective and statistically relevant approach to outlining the problem. A 2001 study of executive failure done by Executive Search Information Exchange pegged the average failure rate for recruited executives in their first year at between 40% and 50%. More recently Michael Watkins,a recognized thought leader in executive leadership and author of The First 90 Days, has revealed from his research that a staggering 58% of new executives hired from the outside fail in their new position within 18 months.
The cost of executive failure? A Mercer study estimated that it's often more than $500,000 or 2.5 times salary. And this doesn't include organizational, opportunity, productivity, and transitional costs for the new executive (Mercer et al, 1999). Including these other components of executive hiring, the calculus for fully loaded cost to the organization per failure at the executive level can top a million dollars (Fortune Magazine).
After spending a decade or more as an executive recruiter working on early & growth-stage CEO searches, it seems worthwhile to take a look-back on some of the reasons CEOs seem to fail. In fairness, we're a boutique firm, so the sample set isn't hundreds of searches. However, it's also more than anecdotal, as for every CEO search we've done, there was a high probably that there were several CEOs who had already come before our search, and in doing a thorough CEO replacement search, we are students of why predecessors failed in order to ensure we don't repeat others' past mistakes. Another macro observation is that these failures don't seem to be different from practice area to practice area, or geographic region to geographic region. We're a multi-specialty firm, yet we don't see that software/ Internet/ media CEOs fail for dramatically different reasons than medical device CEOs or cleantech or biotech CEOs. Nor is there great variability when you look at CEO searches in one innovation center versus another. With presence in Boston and New England, New York and the Tri-State area, Silicon Valley/San Francisco, and London/Cambridge, England, we've been able to test this and haven't witnessed much foundational difference one area versus another.
The following 7 reasons below cover the vast majority of CEO executive failures we've seen:
1. Founder "Peter principle." This has been well-documented by others, most notably by John Hamm, venture capitalist at VSP Capital and leadership development coach who authored a Harvard Business Review article a few years back, titled "Why Entrepreneurs Don't Scale." To set up John's observations, most of our time as executive recruiters, we focus on helping early-stage companies jump the leadership chasm from entrepreneurial to professional leadership. More often than not, there is absolute certainty that a casualty will occur-- the only question is whether that casualty will be the founder(s), or the company. Where venture capital or private equity is involved, all is done to avoid the latter in favor of the former. Regardless, it is too rare an occurrence when this collision between founder CEO, growth mandate, and outside investors ends positively, and if the company survives, it has to deal with the emotional baggage of shedding this first founder layer and all the pain this brings with it. John outlines four management tendencies that work for smaller-company environments but become Achilles' heels as these CEOs try to scale their companies. The first tendency is loyalty to founding team mates. In entrepreneurial mode, you need to lead as though you're in charge of a combat unit on the wrong side of enemy lines where anyone on your team is a keeper. However, in larger company growth mode, blind loyalty can become a liability. At some point, it may be required that the rest of the team that started the company with the CEO may need to be changed out for an executive team with experience at the "growth-stage" versus just the "start-up" stage. The second tendency, task orientation, is critical in driving toward a big initial product launch, but excessive attention to detail can cause a growing organization to either suffocate under such leadership--one that can't generate creative ideas or momentum without being instructed by the CEO--or lose sight of its long-term goals. The third tendency, single-mindedness, is important in a visionary CEO who is unleashing a revolutionary product or service on the world. However, this can limit the company's potential as it grows, as all good ideas aren't always born from one person. In addition, often a lack of self-awareness or "emotional intelligence" can create a large blind spot around what isn't working with the original idea, and instead of an ability to iterate to a better but related idea for the marketplace, the founder CEO can become caught up in the initial "vision" and stick to it regardless of external market input that would indicate changes to the initial value proposition are needed to capture broader market adoption. The fourth tendency, working in isolation, is fine for the brilliant scientist focused on an ingenious idea, technology or science. But it's a non-starter for a leader whose expanding organization increasingly relies on people other than the CEO. There is also a significant difference in skill set required when the company grows beyond a single layer of management, requiring, VPs who manage directors, who may manage managers. Managing through a multi-layer management system requires a very different managerial toolbox. As the summary for the article outlines, "Leaders who scale deal honestly with problems and quickly weed out nonperformers. They see past distractions and establish strategic priorities. They learn how to deal effectively with diverse employees, customers, and external constituencies. And, most important, they make the company's continuing health and welfare their top concern."
2. Unable to "imbed" with the existing team. This is all about forging meaningful bonds, trust, and a following with the existing executive team/staff/employees as the "newcomer." This is most often the cause for CEO failure when an outside CEO is brought in as the first successor to the founder CEO. We refer to it as "organ rejection." The host organism (the company) has a high degree of the founder CEO's DNA in it. That founder CEO has proven that they are a miracle worker, coming up with the idea, building it out through proof-of-concept on a shoestring budget, getting venture or other funding for the idea, that the rest of the employees who imprinted on the founder CEO "reject" the new CEO as an "imposter" or "foreign matter."
3. Getting sideways with the board. As executive recruiters, we hear this often. A CEO, whether founder or non-founder, doesn't gel with the Board of Directors. In the case of a growth-stage company, there is often outside capital involved, and investors who serve as part or all of the board of directors. A CEO's inability to quickly understand the drivers of each board member, and inability to build a communication bridge that may be unique to each board member, is very likely to fail, regardless of whether growth milestones are being hit or not. One a board member loses faith in a CEO, it's very hard to win that faith back. Activities that often alienate a board include hiring issues (holding on to existing employees too long, or holding off on hiring into a key role, board communication issues (not sharing the bad with the good), lack of realism around budgets and burn rate and unwillingness to make the tough decisions, etc.)
4. Inability to balance revenue/burn rate. There is always a constant struggle between CEO and investors if the company has a net burn rate (spending more cash than revenue coming in the door). Just last week, I heard from a venture capitalist who said that a CEO, during a board meeting, said that he was unwilling to cut the burn rate for fear of being unable to scale fast enough to meet demand once the product "got traction." The VC then said, "After the board meeting, I got a call from one of the other investors, expressing concern that the current CEO just didn't understand the realities of the situation, and he felt it was time to start a search for a new CEO who did." Often, this is a circumstance where the CEO has come from a larger company environment, and has rarely if ever faced a situation where "out of cash," is a literal term, versus just a euphemism for asking the parent corporation for some more capital.
5. Inability to hire well. There is an expression, "the first time, shame on you, the second time, shame on me." This is what the board of directors often employs when a CEO can't find the right VP level executive to successfully fill a key seat on the management team. Often, it's the VP Sales. When the product is still in development, it's often the VP Engineering. However, if the CEO churns either of these positions with several candidates that don't end up meeting board expectations, ultimately the board feels it's perhaps not these VPs, but rather the CEO who needs to be changed out. When a VP Sales commits to a revenue target, and then misses it repeatedly, often the CEO and board decide to make a change in the VP Sales. multiple replacement in a single role, VP Sales, or VP Engineering) (blaming someone else
6. Change of business model. Part of emerging & growth stage company building is the iterative approach to finding the magic business model that takes root and thrives. At times, founders, investors, and early team members develop a thesis on what model they're going to chase first, and hire a CEO into that thesis. However, as often as not, the early iterations miss their mark, and the ultimate business model that evolves as the winner is one that doesn't play to the strengths of the earlier CEO hired. In this eventuality, it's much like "no fault insurance." Neither driver is at fault, but in the best interests of the company, the earlier CEO hired needs to be changed out to make room for one better tailored for the market approach the company finally settles on as bedrock on which to scale the company.
7. Leadership fatigue. At times, running a company turns into a grind. The company doesn't grow as fast as anticipated, or the magic formula for business model doesn't materialize. Or the executive team doesn't come together as all wished at the beginning. At this point, the company doesn't fail or flame out, but nor does it continue to show healthy growth and positive direction. Sometimes, a company grows for a bit, then plateaus and efforts to move the proverbial needle continue to fall short. One of my favorite expressions comes to mind, "The definition of insanity is doing the same thing over and over yet expecting a different result." If most all other variants and permutations have been tried, no doubt it's possible that leadership fatigue has set in and the company is in need of a fresh horse.
There certainly are other subsidiary reasons that less often cause failure-a CEO not being technical enough to shepherd a pre-revenue start-up through early product development stages into successful commercialization, or not enough industry domain expertise in an area where a Rolodex of relationships are critical to obtaining early customer wins or market credibility. However, for the most part, these and many other one-off failures function as exceptions to the larger CEO failure points outlined above.
One of the questions that naturally follows in exploring the most typical reasons for failure is what steps, actions, or changes can be made to optimize the probability for CEO success? Is there "another way of doing it?" One of the best ways we've found is to split the Chairman and CEO roles. However, this is a topic for another discussion. It's something that's actually done in the UK as SOP, and even out in Silicon Valley more than in Boston or New York. We've executed our fair share of executive searches in each, and comparing the perspectives around leadership-sharing held by venture or private equity investors is interesting grist for further analysis.