At a time
of great turmoil at the top of many iconic American companies,
the job of vetting and selecting CEO candidates has gotten tougher.
Even a decision
to go with an insider doesn't ensure a smooth transition. Disney's
announcement last weekend that Robert Iger will be the next CEO
ended a five-month search but left directors in a standoff with
dissident shareholders. Roy Disney and Stanley Gold, former Disney
directors who last year led a shareholder revolt, denounced the
board's search as a "sham" and the selection of Mr.
Iger -- Disney's No. 2 executive and current CEO Michael Eisner's
favorite -- as a "rigged" choice.
It's rare
for a newly picked CEO to face this level of criticism, but it's
an indication of the perils confronting directors at the growing
list of brand-name companies seeking new leaders, including Boeing,
Hewlett-Packard, Merck and Fannie Mae. Every day, it seems, another
CEO at a major public company steps down or is dismissed, leaving
directors scrambling for a successor.
The list
of criteria boards must weigh is also lengthening. Boeing's dismissal
last week of CEO Harry Stonecipher, after directors learned about
his explicit e-mail to a female employee with whom he was having
an affair, is increasing the pressure to scrutinize candidates'
private conduct as well as their professional records. That involves
not just making certain that CEO choices haven't committed fraud,
cheated on expense accounts or performed other dishonest business
acts, but also determining if their personal behavior disqualifies
them as leaders. Among such behavior: a drinking problem, failing
to file personal income-tax returns or a history of making unwanted
sexual advances to colleagues or subordinates.
"We
may have just entered the post-Stonecipher era in executive searches,"
says Robert Brudno, managing director of Savoy Partners, a Washington,
D.C.-based search firm.
This doesn't
mean that boards are about to start investigating the dating histories
of prospective CEOs. Indeed, "if every executive who ever
had an extramarital affair at some point in his life was ruled
out, you'd quickly run out of candidates," Mr. Brudno says.
And as Boeing noted in its announcement about the departure of
Mr. Stonecipher, he was asked to leave because he violated the
code of conduct he had helped to draft, which prohibits any behavior
that may embarrass the company, rather than because of his relationship
with another Boeing executive.
But boards
do need to give more weight to a prospective CEO's integrity,
and that requires that they understand "the bright line between
morality and integrity," says Scott Flanders, the CEO of
Columbia House, a New York mail-order marketer of music and videos.
Many people
"might be offended by the [four-letter] words that a lot
of CEOs use," he notes, but not liking someone's language
or their sexual preferences "is a moral judgment, which is
very subjective," he says. Integrity, by contrast, is about
telling the truth -- "and it should always be strike three,
you're out, if you lie to your board, your secretary, employees
or anyone you do business with," he adds.
While lying
to your wife may appear to fall into that category, it's really
conduct that compromises your company that matters. After all,
there's no Sarbanes-Oxley Act for sex.
Amid the
heightened concern about a wide range of candidate traits, boards
still have to choose leaders who can actually run the company's
businesses. Directors who vet a candidate's character but choose
someone who doesn't understand a company's culture, strategy,
products and biggest challenges -- or simply can't win the trust
of subordinates -- fail investors.
There are
all too many examples of CEOs who were named to top jobs after
lengthy searches -- from Richard Brown at Electronic Data Systems
to Carly Fiorina at Hewlett-Packard -- who then replaced veteran
managers and laid off employees, only to be ousted themselves,
with rich severance deals, when they couldn't achieve profit growth.
The tougher
standards are producing longer, more rigorous searches even when
the corner office is already vacant. Directors at Office Depot
spent five months searching for a new CEO before yesterday naming
Steve Odland, who was CEO at AutoZone. And directors at Computer
Associates vetted John Swainson over a three-month period before
naming him president and chief executive-elect last November.
The company's prior CEO has been charged with accounting fraud.
"Every
aspect of my personal lifestyle was investigated [before] I took
the job," says Mr. Swainson, who became CEO last month. Among
those contacted about Mr. Swainson were scores of people he had
worked with at IBM, where he was employed for 26 years. Mr. Swainson
also had numerous interviews with the board search committee and
the nominating committee, as well as individual meetings with
directors.
Character
issues that weren't even considered in the course of an executive
search five or 10 years ago now get a lot of attention, says Michael
Allison, CEO of International Business Research, a corporate-investigations
firm in Princeton, N.J. A routine check on the Internet, Mr. Allison
notes, can quickly uncover whether executives have been arrested
or targeted in race- or sex-discrimination suits, filed for personal
bankruptcy, or misrepresented their education or work experience,
among other things.
During one
background check, Mr. Allison learned that a candidate for a top
job was once charged with drunken driving. He was subsequently
dropped from the prospect list. "It wasn't so much that he'd
had four glasses of wine but that he showed poor judgment in driving
afterward," says Mr. Allison. "He certainly earned enough
to take a cab," he adds.
Michael Leven,
CEO of U.S. Franchise Systems, an Atlanta-based hotel chain, predicts
that CEO candidates "may soon have to undergo the kind of
FBI clearances given to prospective cabinet members. And,"
he adds, "that may be appropriate given the money they earn
and the responsibilities they're given."
Standards
about what constitutes good personal conduct vary considerably
across companies, industries and countries, however. Most European,
Latin American and Asian-based companies wouldn't consider booting
a CEO over an extramarital romance and can't understand Boeing's
decision, says Mr. Brudno. "Some overseas companies are still
paying for apartments for their top executives' mistresses,"
he adds.
In the U.S.,
most companies no longer prohibit consensual romances between
employees, whether they are single or married, as long as neither
person reports to the other. And if Mr. Stonecipher "had
been CEO at a retail or entertainment company, he might have just
gotten a slap on the wrist," especially after acknowledging
he had erred in writing explicit e-mail on the company's computers,
says Mr. Brudno.
But Boeing
had little choice but to oust Mr. Stonecipher even after he acknowledged
his mistake. The former CEO had been brought back from retirement
15 months ago to bolster ethical standards following a string
of scandals at Boeing.
"One
of the rules of doing business with Boeing's biggest customer
-- the government -- is being discreet," says Mr. Brudno.
Executive
recruiters must also be discreet when vetting CEO candidates.
They can't, for example, officially ask questions that may be
deemed discriminatory, such as a candidate's age, race, religion
or marital status.
"I
do ask about health, any history of a drinking or drug problem
or a financial problem that could embarrass the company, and I
encourage candidates to tell me upfront about anything that will
come out anyway in background checking," says executive recruiter
Pat Cook, head of Cook & Co., a Bronxville, N.Y., search firm.
Columbia
House's Mr. Flanders says he asks specific questions to ensure
honest answers. Instead of inquiring what a candidate earned at
a prior job, he asks, "What income figure did you have on
your W2 form last year? It's interesting to see the number of
people who then start to backtrack about what they claimed their
salary level was," he adds.
But candidates'
references, along with the former colleagues and others whom recruiters
seek out, often provide the most revealing information. Jim Citrin,
a managing partner at recruiter Spencer Stuart, says his ears
perked up when a reference described one executive candidate as
"eccentric, with some odd habits." A second reference
who worked with the candidate said the same thing but, like the
first, wouldn't give any details.
Finally,
a third said the candidate "spent a lot of time at work surfing
pornographic Web sites," Mr. Citrin says. He gave that information
to his client, who didn't hire the candidate.
