CEO searches are on the rise. That’s what we’re witnessing in our Board & CEO practice at The Good Search, a trend that Bloomberg Businessweek is reporting in a recent article, The Recession Is Gone, and the CEO Could Be Next.
“After three years of declining turnover among CEOs, churn at the top is back. As the economy improves, the rate of corner-office shakeups has picked up as more boards replace veteran CEOs with younger leaders with very different résumés.”
Underperforming CEOs are having their heads handed to them, as the economy rebounds and boards are positioning their companies for growth. Hot on the list of must-have skills are international, sales, and marketing acumen as well as candidates who have worked in more than one industry, offering breadth of domain expertise. Out is single-company experience. Working for one employer one’s whole life often leads to culture shock and failure at the next company — too many times the transplant doesn’t take.
Interestingly, CEO churn pulled back with the financial crisis. Notes the magazine:
“CEO turnover declined from 12.7 percent in 2007 to 9.4 percent last year, according to a study of Standard & Poor’s 500-stock index and Fortune 500 companies by executive search firm Crist/Kolder Associates in Chicago. One likely reason: Boards were reluctant to change leadership during the recession, concerned that if a CEO left, investors might think the company was coming unglued.”
But now that the economy is rebounding, experts are predicting a return to double-digit turnover in 2011 and 2011. For CEOs who slashed their workforce while they spared themselves, this trend carries with it a whiff of comeuppance.
A Nor’easter hit my hometown of Westport, Connecticut — rather, more like a hurricane, with wind gusts exceeding 60 miles per hour. It rendered my town impassible. Downed trees blocked egress on virtually every major and minor thoroughfare. We were without power, cable, television, and phones for a week. Hotels within an hour’s drive radius quickly sold out, their rooms filled with displaced victims of the storm and CL&P crews brought in from surrounding states to repair the damage. We felt lucky to find room at a Marriott just 30 miles away, and even luckier that we could stay there the full week while others who did not foresee an extended stay were forced to find shelter elsewhere.
In retrospect it seems an fitting metaphor for our financial crisis, and, in turn, for the crisis experienced by the executive search business, especially retained search firms. The massive trees felled on our property serve as testimony to how swiftly the mighty have fallen.
According to my CPA, the executive search business has always been cyclical. He does the taxes for number of search firms, large and small, retained and contingency. He’s noticed these companies are always among the first to get hit in a financial downturn and the among the last to recover. Hiring executives pull back hard on hiring at the the first signs of a slowdown and they often postpone hiring until they’re sure a recovery is well underway. Ironically, retained search is always hit the hardest: it seems they have the most to lose.
Experts believe we have witnessed what will remain the worst economic crisis of our lifetimes. In fact, many are predicting that the retained executive search business has been forever changed. Companies reduced their use of retained search starting in 2007 and, some say, many learned to live with it quite simply because it is so costly. Traditional retained search charges as much as 33% of a candidate’s first year compensation plus expenses. Moreover, nearly half of the time the money’s wasted because, according to industry expert David Lord, 40% of all retained searches fail to complete. And it appears, a growing number of corporations have had enough.
Korn Ferry’s stock price is still down 30% since before the financial collapse from a high of $26 in June of 2007, dipping to as low as $8; Heidrick & Struggles stock price is down 40% from a high of $51, dipping to as low as $14. Heidrick is now ranked among the bottom five companies in the Human Resource & Employment Services industry as measured by the potential gains between the current stock price and the projected average analyst target.
As a result, the major retained search firms have diversified their service offerings to make up for the deficit in search engagement revenues. But the writing is on the wall. An increasing number of employers are breaking with tradition and are turning away from traditional retained search and toward more innovative firms that offer a better return on their investment.
New York Times columnist Thomas L. Friedman has written an Op-Ed piece that should give all those involved in talent acquisition pause . There is “actually a critical, but unspoken reason for the Great Recession”. That reason has coincided with the mortgage crisis and the subsequent meltdown on Wall Street and in financial markets wrapped around the world. At the same time, Americans were spending more than we ought on houses we couldn’t afford, we were not investing in the one thing that could help us maintain our global competitive advantage:education.
In fact, many see our Nation’s sub-standard education as the primary reason for the downfall of our global competitiveness. Strategic thinkers with high-end analytical, problem solving skills — those who invent new ways to old jobs or who create new services or who attract new business — are fairing far better than highly educated engineers, lawyers, and accountants focused on more routine tasks tasks that increasingly have been outsourced overseas. Consequently, the frightening realization is this: college educated, task-oriented workers will likely never get their jobs back. Those jobs are gone. But there are numerous lucrative jobs that go unfilled with U.S. workers simply because we have refused to grow our own through education — the immediate case-in-point that springs to mind is that of health care workers.
We’ve got one segment of our population that is undereducated who either dropped out of high school or did not graduate from college (about 72%) — — and another part of our population that needs to be re- college-educated. So while we think about solving the problems that originated with sub-prime mortgage, we have to understand that a sub-prime education helped get us where we are today. From where I sit, the opportunity cost of not investing in an affordable education for all Americans is far greater than the cost of doing the right thing.