What Are The Right Criteria For Selecting A New CEO?

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Selecting a new CEO is the most important thing a board does. Choose the right one and everything else will be easier. Choose the wrong one, however, and it can be a catastrophe. Here’s how to select the right criteria and weigh the candidate’s qualifications for a successful hire.

Why Hiring CEOs Is Hard

Boards face several challenges in the task of hiring a new CEO. First, there is very little objective data on how to hire a great CEO. Second, few people have hired more than a handful of CEOs during their careers, limiting their experience. Third, few agree on what the CEO’s responsibilities are and what they want him or her to accomplish. Obviously, the board wants the CEO to increase shareholder value, but that is as helpful as telling a football coach you want him to win.

Every board would love to hire a CEO who has run a similar-sized company in the same industry and delivered exceptional returns. But even if the board can find this ideal CEO, he or she is unlikely to want to do the same thing again. People who want to keep moving up in their careers will look for a new challenge and a bigger opportunity. Therefore, a board will usually have to compromise on their ideal candidate and hire someone who doesn’t check all the boxes.

The Criteria: Depends on the Company’s Situation

First, the board should discuss openly what they want the new CEO to accomplish, and ideally come to some agreement. The question then becomes: What criteria predict the success of a candidate for this role? The answer depends on the company’s situation. Let’s assume for this discussion that the board is replacing the current CEO and looking for the new leader to make significant changes in the organization. In this case, they should almost always look outside the organization for the next leader. Leading significant change is a difficult challenge and usually requires an experienced leader with a fresh perspective on the company.

Company size: The first criterion most people look at is size of the organization the candidate has run in the past. Has he or she led a company of a similar size? The question is how you define “similar.” I think many boards define this much too narrowly. For example, if a board is hiring for a $500 million company, some would not consider a CEO who ran a $200 million company. I think this is too restrictive.

While boards would never hire a person who ran a $50 million company to run a $10 billion company, I think they should think in terms of powers of ten. If the company is less than 10 times the size of the CEO’s prior experience, he or she probably won’t be overwhelmed by the change. The less difference the better but knowing the need to compromise, this rule makes sense.

Public vs. Private: There are two other size-related considerations. One is whether the CEO candidate has experience running public companies or private companies. This is a significant difference, and I would want any potential public company CEO to at least have experience working with a public company board.

Number of Locations/International Business Size: The second consideration related to size is the number of locations and particularly how big the international component of the business is. If a CEO has not had international business experience, this is a big hurdle if he or she is moving to a company that operates worldwide.

Relevant Industry Experience: Once a candidate has met the size-related criteria, the next issue is his or her experience in the industry (or similar industries). The first responsibility of a CEO is to own the vision of the company, which is difficult to do if he or she doesn’t have a good understanding of the company’s industry. There are two key areas to explore with potential candidates that cover the initial strategic challenges a new CEO will face:

  1. Does the candidate have experience with how the product is produced and delivered?
  2. Does the candidate understand how and why customers spend money with the company?

Prior Experience in the CEO Role: I saved my favorite criterion for last: Should you hire someone who has never been a CEO? The chance to get a CEO title is highly appealing to many talented executives and often attracts people who would never consider working for a new company in any other role. The challenge I have found is that very few other roles in a company adequately prepare someone for the CEO role.

Often, boards select someone who has had a GM title at a larger company, thinking that role is comparable to the CEO role. While some GM jobs are similar, in my experience most are closer to a sales executive role and don’t provide much additional preparation for the CEO responsibilities. It is rare to find a large company sales executive who can transition well to the role of CEO at a smaller company.

Following my rule of ten in terms of size, I would much prefer finding a successful CEO at a smaller company to run a bigger company. The transition will be much easier as the learning curve will be much shorter.

Hiring a new CEO is one of the biggest challenges boards face. They need to understand and agree on what the CEO’s role is, what situation the company is in, and what they are trying to accomplish. Then it will be much easier to choose the right criteria for selecting a candidate who will be successful.

I am the CEO of Khorus, a business management software system for CEOs; author of "The CEO Tightrope"; co-founder and managing partner of private equity firm Lone Rock T...