Share Podcast
Why More CEOs Should Be Hired from Within
Claudio Fernández-Aráoz, a senior adviser at the global executive search firm Egon Zehnder, makes the case for finding a company’s next CEO inside the firm. But to...
- Subscribe:
- Apple Podcasts
- Spotify
- RSS
Claudio Fernández-Aráoz, a senior adviser at the global executive search firm Egon Zehnder, makes the case for finding a company’s next CEO inside the firm. But to find the best contenders, organizations have to learn what to look for, how to find it, and how to nurture it. Fernández-Aráoz is the co-author of the new HBR article “Turning Potential into Success: The Missing Link in Leadership Development.”
SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast, from Harvard Business Review. I’m Sarah Green Carmichael.
A few years ago, Microsoft’s board was looking for a new CEO to replace Steve Ballmer. At one point, they were considering Alan Mulally, then the CEO of Ford.
CLAUDIO FERNÁNDEZ-ARÁOZ: He was 68 and coming from the auto industry—very different background.
SARAH GREEN CARMICHAEL: That’s what Claudio Fernández-Aráoz was thinking.
CLAUDIO FERNÁNDEZ-ARÁOZ: Doesn’t Microsoft, with hundreds of thousands of people working for them, have one internal candidate? It doesn’t make much sense.
SARAH GREEN CARMICHAEL: It didn’t make much sense to Fernández-Aráoz, who has three decades of experience with executive searches. That’s because he had seen how large companies usually have many more internal candidates than they realize. Unfortunately, those firms just haven’t been preparing their high-potential employees to be “competent” CEOs.
And when Fernández-Aráoz says “competent,” he’s talking about seven core competencies. He says new research shows that hiring managers can spot that talent years before there’s an empty chair in the C-suite. Case in point: Microsoft finally did find its third CEO in a company insider.
CLAUDIO FERNÁNDEZ-ARÁOZ: In the end, they promoted Satya Nadella, which I thought was a great decision.
SARAH GREEN CARMICHAEL: Joining us now to talk about how more companies can make good decisions by developing and hiring insiders is Claudio Fernández-Aráoz. He’s a senior advisor at Egon Zehnder. The global executive search firm has new research on developing and hiring insiders. Fernández-Aráoz helps spell it out in the article, “Turning Potential into Success: The Missing Link in Leadership Development.” It’s in the November–December 2017 issue of Harvard Business Review.
Claudio, thank you for talking with us today.
CLAUDIO FERNÁNDEZ-ARÁOZ: Pleasure, Sarah. Always a pleasure.
SARAH GREEN CARMICHAEL: So, I was intrigued to see that you were writing this article about developing talent inside your firm, because you help firms find talent from outside their firms. Are you trying to put yourself out of business?
CLAUDIO FERNÁNDEZ-ARÁOZ: It’s not that we are working ourselves out of business. We believe that we should add value to our clients, and we should continue assessing internal and external candidates without any conflict of interest on an equal basis.
Now, we are also aware that there is emerging research that shows that organizations, particularly at the very high levels, are hiring from outside excessively. So, the typical large American firm would, for example, hire a CEO from outside about 30 percent of the times. And there is some research that I believe in that shows that they should only be doing that on average six percent of the time. So, five times less. It is so much better to promote someone from within if you have the right type of candidate, not only from an economic point of view, as this research shows, but also from a motivational point of view. Who would like to work for a company, where, whenever there is an opening at a senior position, they hire someone from outside, because they are so clever and we are so stupid down here. So, I think it’s the right thing to do.
SARAH GREEN CARMICHAEL: If firms are hiring outside CEOs about 30 percent of the time, but they should only be hiring outside CEOs, according to your research, about 6 percent of the time, why is the grass always greener?
CLAUDIO FERNÁNDEZ-ARÁOZ: Outside?
SARAH GREEN CARMICHAEL: Yeah.
CLAUDIO FERNÁNDEZ-ARÁOZ: Basically, what we found in our global database, where we typically have people from the top three levels—so, it’s CEO and the next three levels—that about 9 percent of them have the potential to become very successful CEOs. Now, what happens is this: if you only look at the next level, at the direct reports of the CEO, that’s typically about 8 people. So, you know, 9 percent of 8 people gives you 0.7 internal candidates, which explains why in the other 30 percent of the times they go outside. So, this is consistent, actually, with what happens, but only if you look at the direct reports. Now, if you look one level below for each of those 8 direct reports, you have 8. Eight times 8 is 64. That’s the next level, the level below the CEO-level executives. Those 64 plus the other 8, that’s 72 people.
If you look at that pool, 9 percent out of that pool, 9 percent out of 72 gives you a 6.5 expected CEO candidates. So, what you should do is start your CEO succession, not at the 11th hour, but, say, three years before. And then if they are at the level below the C-level, you should promote, say, a couple of them so as to continue their development. And quite likely three years after that you will have two viable candidates. So, I think that this is one of the problems: organizations don’t proactively start their CEO succession early enough.
SARAH GREEN CARMICHAEL: How come organizations are seemingly so bad at spotting their high-potential talent?
CLAUDIO FERNÁNDEZ-ARÁOZ: I remember I was once giving a keynote speech at the World Business Forum in New York. There were, like, 4,000 people in the audience, and I asked, how many of you who are not from HR have been trained in assessment?
Only, I think, that it was 20 raised their hands. So, half a percentage point. So, if you don’t know what to look for, and you don’t know how to look for what you don’t know that you’re looking for, it’s very hard to get it right. But even if organizations were very good at using a robust model – which they aren’t – for assessing potential, at training particularly the line managers – because they need to be convinced about how to assess people – then you need to be able to properly develop the people.
Boris Groysberg has been conducting research across 500 organizations for several years in a row from all sectors and asking them how they would rate themselves across, I think it is, 37 different talent practices. One talent practice would be recruiting; another one would be onboarding; another one would be compensation; another one would be job rotations. And what he found is that organizations consider that job rotations is the practice in which they score the worst, while at the same time in a research we conducted with Egon Zehnder where we looked at 827 executives who had very successful accelerated careers, we asked them to look back and to identify what helped them unleash their own potential. And by far the No. 1 factor was stretch assignments and job rotations.
So, first, they don’t know what to look for. They don’t have a robust model for assessing potential. Second, they don’t know how to look for that in the sense that they are not properly trained in assessment—how you should conduct an interview, how you should conduct reference checks. And third, even if they did all of those things well, which they don’t, then you need to develop the people.
And by far the most powerful way to develop people is through clever job rotations and stretch assignments, and organizations are lousy at that. So that’s why this gets done so poorly, and that’s why it’s an extraordinary opportunity for those organizations that want to get their leaders’ development right.
But the hard thing is, you know, the organizational challenges associated with that. For example, many leaders don’t want to give their best players to others for the right type of job rotations because they don’t want to lose them. So, you really need to create an incentive for people to do this, because otherwise you get into all of these games where people would not like to lend their great players or would like to get rid of their poor players.
SARAH GREEN CARMICHAEL: What would a good effective developmental job rotation look like?
CLAUDIO FERNÁNDEZ-ARÁOZ: So, the first thing that you need to realize is that not all high potentials are created equal. In order to properly identify high potentials, you need to look into five things. One is the right motivation, which is very circumstantial. And it’s different if you are running an NGO or a charity or if you are leading a private equity firm; and it’s because of this reason not easy to compare across roles and positions and individuals.
But then there are four key hallmarks that help you assess potential, help you predict whether someone will be able to develop their level of competence significantly. Those are curiosity, they are highly insightful people, and as a result of their curiosity any insight, they come up with a creative vision. And then the third hallmark kicks in, which is their great engagement. They are outstanding at engaging others’ minds and hearts. And finally, high potentials have great determination. They don’t crack under pressure. They are resilient individuals who keep on striving towards challenging goals in good times and bad.
So, great organizations are those who realize, as I was saying, that not all high potentials are created equal. So, for example, someone who has a very strong level of curiosity and insight can develop a very high level of strategic orientation because in the end, you know, strategy is about asking the right questions and drawing the right implications. So, the first thing that you need to do is to assess in your senior leaders these four hallmarks and conclude on what their specific profile of potential is because that will give you a hint about which competencies they can develop. And then what you need to do is to match those not just the current competencies but the potential competencies with the competencies needed for the top job. So, if someone, as I said, is very good in terms of curiosity and insight, they can develop a very high level of strategic orientation. Well, he or she should be exposed to strategic projects, not just in a full-time job—maybe participating as a member in some strategic project.
SARAH GREEN CARMICHAEL: Is it risky to put someone in a role that they’re maybe not ready for?
CLAUDIO FERNÁNDEZ-ARÁOZ: If, like most organizations, you don’t use a robust, empirically validated model for assessing potential, you are taking a risk. But if you properly assess potential and then you draw these forecasts on how far they can develop along each competence, then you are not running a risk because you will be appointing people based on the level of competence that you are sure they can develop—while you would be running a big risk even if you were appointing someone who today has the right experience, and even the right competence; if that person has very limited potential, that’s a larger risk because, as we know, jobs are changing all the time.
SARAH GREEN CARMICHAEL: What do you think is this sort of ideal way of working between the hiring manager and HR to, kind of, identify someone who might be great in a role and be able to grow in and with a role but whose resume doesn’t, sort of, tick take all the bullet points that might be needed to do the job.
CLAUDIO FERNÁNDEZ-ARÁOZ: Yes. So, people are usually hired because of their experience, because of their IQ, and then they get promoted or fired because of the way in which they manage themselves and their relationship with others. And the way to assess that is not by looking at the CV; the way to assess that is with the right type of interviews and also the right type of reference checking. So, speaking with people who have seen them in action, and this is extremely important for internal candidates as much as for external.
For external ones, hopefully you will do it, and the search firm helping you will do it. And sometimes when it’s an internal candidate, you feel, sort of, shy about doing it. Someone has worked here for 20 years, and then you are asking people who have worked with them about them, and they say, but isn’t 20 years of loyal service and great performance enough?
And it’s not. It’s enough to confirm what they’ve done in the past, but it’s not enough to check the level of competence that they have for a job not in the past but in the future, which may require different competencies. And then the second thing that you need to do is to, again, assess their potential profile because that will tell you how far they can go.
So, the answer is you cannot tell this from a CV, but you can come to a conclusion about this by looking at the assessment of their level of competence and potential. And it is very important that the line managers get trained on this, for two reasons: first, because they will never and they should never fully delegate their people decisions to HR, because if they are not convinced about the process, the methodology, I mean, they will never support that decision, and then the person will fail. Because in addition to having their properly planned, clever job rotations, you’ll need lots of support for that person to succeed, and the support from the boss is one of the most important sources of success once you have decided on these job rotations.
So, the answer is, the CV can give you a very, very first, partial piece of information but most of the information should come from the assessment of the competencies and the potential profile, which will allow you to estimate how far the person can grow along each specific competence.
SARAH GREEN CARMICHAEL: One of the things that I always hear people say when we talk about recruiting and women is executives will say, well, it’s so hard to find qualified women. And so, we’re looking and looking for women and we can’t—it’s really, we really want to find some women, but we just can’t find them. Do you buy that?
CLAUDIO FERNÁNDEZ-ARÁOZ: Of course not. So, what we found when we looked at our database is that on average women are slightly less competent than men, and they are particularly less competent in two out of the seven core competencies that we use. One is market understanding, and the other one is strategic orientation. But across five out of seven competencies, they are statistically significantly below.
But interestingly, when we look at the potential of the women that we have in our database, they are stronger than men in three out of the four hallmarks of potential. So, they are slightly below in terms of insight, but they are higher in terms of curiosity, engagement, and determination. And they are way more determined than the average male exec is. So, how come that women have higher potential but lower competence than men? Well, it’s because they were not given the chance.
So, if you are not given the chance, again, to manage a team, how can you develop your team-leadership skills? If you’re not giving the chance to participate in strategic projects, how can you develop your strategic orientation? So, I really believe that women are by far the greatest opportunity that we have to deal with the scarcity of leadership talent. And, again, intrinsically they have at least as much and actually statistically significantly slightly higher potential than men. But, again, they cannot develop their competence if they are not given the chance.
So, in practical terms, what leaders should do if they really want to foster diversity is to assess their female leaders, and based on their potential profile, be much more proactive about managing the job rotations and giving them the opportunities to develop the level of competence.
SARAH GREEN CARMICHAEL: Why do you think the women in your study turned up as more determined?
CLAUDIO FERNÁNDEZ-ARÁOZ: I think that probably those who are in our database are those who already have made it quite far in their executive careers; and in order for a woman to make it that far, with all the unconscious biases against women on the one hand, and with all the difficulties that they have as mothers and because of the time they need to take off from work, those who have made it that far probably need to have a higher level of determination than the male executives who have made it. So, I think that’s the reason that explains why the ones who are in our database on average are more determined than the males in our database.
SARAH GREEN CARMICHAEL: When is the right point in someone’s career to try to assess whether they are a high potential or not, and how many people in any given organization do you think could fit the bill of being a high potential?
CLAUDIO FERNÁNDEZ-ARÁOZ: First, I think that one should always be looking into this. I mean, we are born full of possibilities, and sometimes we are quite blind about that, and sometimes we believe that we need to fit the stereotype. This approach about finding our unique potential profile is key for growth and development and happiness in our lives and in our work. So, I think that each one of us should constantly be trying to get a better feeling about how we score on each of these four dimensions. Because among other things, this will help us choose who to work for, what type of roles to work for, and where we can develop.
SARAH GREEN CARMICHAEL: Claudio, thank you so much for talking with us today.
CLAUDIO FERNÁNDEZ-ARÁOZ: Very good. Same here.
SARAH GREEN CARMICHAEL: That’s Claudio Fernández-Aráoz. He’s a senior adviser at the global executive search firm Egon Zehnder and an executive fellow at Harvard Business School. He’s the co-author of “Turning Potential into Success: The Missing Link in Leadership Development,” in the November–December 2017 issue of Harvard Business Review.