Judgment Call: Selecting the Right Leader

CEO succession has never been more important, as the world works its way through the worst financial crisis since the Great Depression. The topic of CEO judgment is pervasive. Everyone from investors to employees to board members is left wondering how their companies ended up in such bad shape.

Many CEOs of financial institutions—Stan O’Neal at Merrill, Chuck Prince at Citi, James Cayne at Bear Stearns, Fred Goodwin at RBS—lost their jobs as their flawed judgments became painfully apparent and their institutions faced failure or bailout.

In my book, Judgment, with Warren Bennis and Chris DeRose, we assert that judgment is the essential genome of leadership. Ultimately, a leader is judged by others on the performance of the organization. That performance relies on many factors; some large (such as who to put in key jobs), others smaller (such as how to manage a product introduction or policy change).

Each performance factor, big or small, requires judgment. They demand that a leader use available data to know when to act and what to do. CEOs make leadership judgments in three big areas: People (who is on or off the team), Strategy (the direction of the company), and Crisis (large disruptive events). How they handle these leadership judgments is key to their leadership success or failure.

Since the selection of a CEO is placing a bet on good judgment, it’s important to understand and frame what makes good and bad leadership judgment. The process is the same for all judgment calls, but the challenges differ. People calls are pivotal since they influence who surrounds the leader and who influences the biggest judgments. While misjudgments in any domain can be fatal, the one where a misstep is most damaging is poor judgment about the people on your team. Only with the right people can you set a good strategy and rise to the occasion during crises.

Framework for Assessing Judgment

We argue that Board level reviews and deliberations of who should be the next CEO, as well as evaluations of the current CEO, should be built around the judgment framework. The framework is used to examine a leader’s past judgment and to predict how well the leader will do with tomorrow’s judgments.

Several factors contribute to good or bad leadership judgment. The leader can make mistakes and still have a good judgment outcome by using the redo loops to continuously self-correct.

The test of leadership is how well the leader adapts during the process to drive a successful outcome. There is no such thing as a good strategy in theory but lousy in execution. A leader sets her organization on a course based on the premise that it will lead to success.

Recognizing execution limitations during the judgment process is as vital as having intellectual clarity about a potential breakthrough strategy. Similarly, people judgments rest on whether people put in leadership positions are able to do the job with integrity and courage as they deliver results.

A key selection screen for any leader—and particularly a CEO—should be the leader’s judgment capacity and track record. The screen for this is a careful audit of the leader’s past leadership judgments. The best way to develop good judgment is through real life exercise; a lot of exercise with consequences and learning along the way.

So if good judgment comes from experience, how do you develop a CEO? Organizations that develop leaders with good judgment have opportunities for early success and failure as a leader. The earlier in a career that a leader can run a fully scoped profit and loss business, the better the developmental experience.

Like an athletic team with a farm league, organizations like Procter & Gamble and GE have several posts which expose leaders to the breadth of profit-and-loss business unit experience. The succession planning process rigorously tests how leaders made judgments, their outcomes, and their ability to learn and adjust.

Board of Responsibility

Succession dialogues in boardrooms rarely examine the judgments leaders have made and the conditions under which they made them. This must change. A good leadership pipeline can only be developed by engaging the board and current CEO with HR to build a multi-generational talent roster.

Developing leaders with good judgment takes years, if not decades. Companies that fail to look seriously at the judgment capability of their leaders today will be hard pressed to find CEO candidates able to cope with the complexity of tomorrow’s challenges.

The selection of a new CEO is a bet on a leader with great people, strategy, and crisis judgment. We present a framework for analyzing a leader’s past judgment performance and for use as a guide to project future judgment capability.

Boards of Directors need to explicitly review CEO candidates’ past judgments, carefully discuss future judgment dilemmas CEO candidates may face, and assess how well their experiences have prepared them.

Beyond using the framework to assess and predict, the Board and incumbent CEO need to install development and assessment processes to develop a CEO pipeline. The first requirement is to provide career opportunities for emerging leaders to make judgments and be held accountable for them.

Hi-Po candidates must demonstrate what they have learned from good and bad calls, and how this will impact their future judgment performance. Ultimately, Boards and incumbent CEOs must build human resources systems that take leadership judgment into account in selecting, appraising, rewarding and developing leaders at all levels.

Otherwise, there is no CEO pipeline—as HP, 3M, Boeing, Home Depot, Pfizer, Royal Bank of Scotland and many other organizations have shown.

First Published in Leadership Excellence www.leaderexcel.com 8/2010