By Heather Douglas
As experienced CEOs in the propane business look to retire, what should board of directors and owner-operators look for as they appoint the next cadre of leaders? While it’s important to ensure smooth transitions, it’s just as vital to protect the company’s ongoing competitiveness and viability during the first few years of the new appointee’s tenure.
McKinsey & Company, one of the world’s largest management consulting firms, recently published a study entitled, What makes a CEO ‘exceptional?’ The authors — Michael Birshan, Thomas Meakin, and Kurt Strovink — looked at the top five per cent of CEOs from 600 chief executives, listed by Standard & Poor’s as running the world’s most successful companies between 2004 and 2014. The trio ranked all CEOs by annualized total returns to shareholders, and normalized for the performance of their broader industry. Those in the top decile, the 120 highest-performing CEOs, achieved at least nine per cent total returns to shareholders above their average performing counterparts.
“New CEOs face enormous challenges as they start assembling a management team and setting a strategic direction in today’s volatile environment,” the authors say. McKinsey found that exceptional CEOs frequently were hired externally (usually twice as likely to come from elsewhere), most conducted a strategic review of the company early in their tenure, then, after two years, redesigned the organization to achieve top decile performance from their employees.
“The exceptional group included some leaders who managed remarkable performance due, in part, to unusual circumstances,” the authors report, “including guiding a company through bankruptcy proceedings and then returning it successfully to the public markets. It also involved CEOs who were able to deliver the highest returns through strategic repositioning and operational discipline over many years, within more normal industry, and economic conditions.”
External Hires Twice as Likely to be Exceptional
McKinsey’s study confirms that outsiders often have an edge over internal promotions. “CEOs who are hired externally tend to pull more strategic levers than those who come from within and outperform their internal counterparts,” the authors claim. Why? These outsiders delivered 500 per cent growth in total returns to shareholders during their tenure.
“Still, 55 per cent of the exceptional CEOs were internal hires,” McKinsey says. “Clearly, insiders can move aggressively and achieve outstanding results. Doing so often means cultivating an outsider’s point of view to challenge the company’s culture with greater objectivity and overcome the organizational inertia that sometimes limits an insider’s span of action.”
Outstanding Track Record Holders Conducted Strategic Reviews Early
The authors evaluated a number of planned and deliberate moves made by most newly-appointed CEOS within their first two years of tenure. These included:
- Conducted strategic review of organization (done by 58 per cent);
- Implemented a cost-reduction program (19 per cent did this);
- Organized a merger or acquisition (done by three per cent and most failed to achieve what was promised);
- Expanded geographically (four per cent);
- Shuffled management team (23 per cent);
- Launched new business line and/or products (40 per cent); and
- Implemented an organizational redesign to eliminate silos (48 per cent).
McKinsey reports that compared with the average CEOs, more outstanding CEOS conducted strategic reviews and implemented cost-cutting programs while the average CEOs did M&As, expanded geographically, reshuffled their management teams, launched new businesses or products, and implemented organizational redesigns.
“Informed by this view of the company’s past – and potential future – performance, this elite group was bolder than other top-quintile CEOs, far surpassing them in the average number of strategic moves they made in their first year,” the authors say. This was effective, they added, because it typically freed up resources, often because they cut costs in lower-priority parts of the company.
Top Decile Leaders Achieved Organizational Balance After Two Years
“In our research on CEOs overall, organizational redesign appeared to be a critical part of the typical high-performing CEO’s tool kit, and management reshuffles were particularly important for CEOs taking over lower-performing companies,” the McKinsey authors report. “Our sample of exceptional CEOs, though, were less likely than the average CEO to undertake organizational redesign or management reshuffle in the first two years of office.”
McKinsey believes this is a function of the strategic game outstanding CEOs are playing or that they “inherited already high-performing companies (which can be hurt by reshuffles) or prioritizing, since there are only so many initiatives and changes that people can absorb in a short space of time.”
Value of High-Performing Teams
McKinsey reports that 90 per cent of savvy investors think the quality of the management team is the single most important non-financial factor when evaluating a new company. “Building a team remains as tough as ever,” they report. “Energetic, ambitious, and capable people are always a plus, but they often represent different functions, products, lines of business, or geographies and can vie for influence, resources, and promotion. Not surprisingly then, top-team performance is a timeless business preoccupation for CEOs.”
Top teams need to be diverse – in training, skillsets, gender, and ethnicity – to prevent slower, and poorer decisions because of lack of bandwidth. Top CEOs consider the complementary skills and attitudes each team member brings to the table. Do they recognize the improvement opportunities? Do they feel accountable for the entire company’s success, not just their own business area? Do they have the energy to persevere if the going gets tough? Are they good role models?
“When CEOs ask these questions, they often realize how they’ve allowed themselves to be held hostage by individual stars who aren’t team players, how they’ve become overly inclusive to avoid conflict, or how they’ve been saddled with team members who once were good enough but now don’t make the grade,” the authors report. “Slighting some senior executives who aren’t selected may be unavoidable if the goal is better, faster decisions, implemented with commitment.”
What makes the difference between a team of stars and an all-star team? McKinsey says all-star teams firstly “are aligned on corporate direction, where there is a shared belief about what the company is striving toward, and the role of the team in getting there.” Secondly, they have “high-quality interactions, characterized by trust, open communication, and a willingness to embrace conflict.” Thirdly, there is a strong sense of renewal meaning that “team members are energized because they feel they can take risks, innovate, learn from outside ideas, and achieve something that matters – against all odds.”
In conclusion, the McKinsey authors believe that not all CEOs will be or can be exceptional – whether they lead propane companies or manage firms in other industries. Yet for any board and CEO starting a transition, there is much to learn from the best. “Adopting an outsider’s view will yield the unbiased insights needed for breakthrough moves,” they caution. “Likewise, investing in a robust calculated review will provide a surer perspective for setting a strategic direction. A grounding in the organization’s context, meanwhile, will help calibrate the speed and scope of change. Those in our sample do much of this at the highest level, setting a benchmark for every CEO aspiring to a successful debut.”
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