CEO selection at the company has never been stranger

The two-man race for the top job at Coca-Cola finally came to an end today, with the unexpected appointment of Dave Delargo, over popular first choice Peter Woburn. Whilst the company was happy to talk about Delargo and their plans for the future, they declined to comment on the reasons for their choice or their process, which we learnt from sources close to the company to be really bizarre.

Like many other Fortune 500 corporations, Coca-Cola has been beset by CEO and succession debacles for years, so it is probably not surprising that after a conventional selection process to identify their top candidates, the board insisted on an unexpected and very unusual final step in the selection process.

This involved a grueling two-week ‘testing process’ by Select International, a secretive little firm with a huge reputation. The process is reputedly based on a computer simulation fed by industry experts and the Coca-Cola board and executive team.

Under high stress conditions, the candidates then have to manage the simulated company through seven years of turbulent operations, including the quirks of the culture and politics of Coca-Cola. The test is simply this, who did the best job?

We wonder if this is the shape of things to come and, more to the point, if it works for CEO selection then why not for presidential candidates?

(Read the full story in the detailed Analysis/Synthesis section – for subscribers only)

ANALYSIS >> SYNTHESIS: How this scenario came to be

Public companies declaring bankruptcy in 2001 rose to 257 from 176 in 2000. Between them they controlled $258 billion in assets. A continuing slew of ‘bad’ news, including CEO failures, unethical behavior and huge salaries have been centre stage in the years since 2000.
A major concern is the way that companies are run and finding the right people to run them. At the core there are three issues that shareholders and the board want to avoid in the people who run their corporations; managerial error, unethical decisions, or intentional criminal activity.
The question is whether the current CEO selection process, which in many cases seem to be pretty hit and miss, is good enough for a job which ultimately can be regarded as ‘life and death’ for many. Think about the hardship caused by corporate failure to many investors and their clients – the people whose money they invest – pensioners, widows and families of the world. Think of the sheer misery of job losses, think about the damage to the economy and the loss of confidence in corporations.
But maybe it is just ‘bad’ companies and ‘bad’ boards who are beset by these problems?. Not if one looked at the evidence. For example Fortune magazine of 31 May 2004 published an article looking at the debacles inside Coca-Cola since 1996 as they battle to find a CEO who can take them forward. Fortune calls their selection process “one of the strangest processes we’ve ever seen”. This despite the fact that they have heavyweights like Warren Buffet and Herb Allen as major shareholders and board members.

Let’s look at some more examples to make the point:
Deadly Corporate Sins. Taken from an article written by Ram Charan and Jerry Useem ‘Why Companies Fail’

  • Companies such as Lucent, Enron, and Cisco were all at the pinnacle of success when they made their rapid declines. These companies took success and growth for granted. They never factored decline of growth into their planning equation.
  • Companies like Polaroid and Xerox were slow to confront a changing market and superior technological competition.
  • Subordinates fear giving the CEO bad news. A good example is presented in the case of Enron’s Jeff Skilling and his tirades when he heard news not to his liking.
  • Global Crossing’s CEO, Gary Winnick, overextended his company’s debt and used a ‘cannonball’ strategy, one shot, and if you miss, it’s bankruptcy.
  • WorldCom’s Bernard Ebbers cared more about acquiring MCI, MFS, and the 75 other acquisitions than he did about making them work together.
  • Rich McGinn cared more about increasing Lucent’s Wall Street prices than he did about improving the company’s products.
  • Some corporations looked for a ‘quick fix’ to overcome financial problems. Kmart decided to use diversification by acquiring Office Max and Border’s bookstores, then vacillating from one strategy to another. In the meantime, Wal-Mart beat Kmart at its own game.
  • Some huge corporations were brought to ruin or almost to ruin by the rogue actions of a few.
  • When questions of illegal activity or transgressions are raised and the first domino falls, it creates a downward spiral eroding customers’ and investors’ confidence.
  • Some companies had a Board of Directors that did not do its job. These Boards relied too heavily on the CEO’s reports, which usually told only the “good news.
  • Despite reforms in corporate governance and transparent reporting and many more popular actions of the day, the power wielded by CEO’s will continue to determine the success or failure of their organizations. They are the captains of these huge ships of commercial fortune or misfortune depending on how they fair.
Many other high risk jobs apply stringent testing as part of a selection process. Many of these testing techniques use simulators for both training and selection, so why not apply it to the high risk appointments of CEO and Executive teams
Simulation technology (computer games) is seen as one of the big breakthroughs for education and in the military. The technology is sophisticated and mature with interesting advances in the area of man/machine interface.

2004: Teaching inside the game
The games industry and technology continues to forge ahead. Games are seen as a way to improve archaic education systems in many countries. The idea is to help with the learning of complex concepts. The educators are fighting the concept on the basis that academic content cannot be transmitted through the games and that problem-solving exercises have no connection to the real world.
The point though is that the game is as good as the input and it is to augment, not replace the learning experience.
Much more importantly, the ubiquitous use of computer games by individuals aged 30 or younger (almost 100%) proves the medium for this market.

2005: Technology surges ahead
Business simulations are popping up everywhere. Market simulations, economic simulations, CEO decision-making simulations, consumer acceptance simulations and many more. The interfaces are simpler and the data driving these simulations are becoming very robust indeed. There are a number of new business ventures emerging in this space; building the simulation engines but also providing the data, the scoring techniques, the future scenarios and much more that is required to present the ‘realities’ that will make these simulations valuable to business.

2006: Enough is enough
It has been a horrible year for shareholders. A continuing slew of failures which has seen many CEO’s fail to keep their corporations on track. They, the CEO’s, never blame themselves, they blame continued economic volatility, global unrest and consumer action and many more factors. The lack of success in corporations is not reflected in CEO pay, which continues on its upward track far outstripping company performance and the remuneration curves of employees in these companies.
Shareholders are fed up, they feel quite rightly that these CEO’s are arguably the highest earners on the planet. For that they want more than excuses, they want results.
A pressure group emerges to demand that the boards of these corporations take action.

2007: Who is Select International?
Rumors abound in the market about a very powerful group being formed to ‘assist’ corporations around the globe with its CEO and Executive team selection. Contrary to most commercial ventures this one is about as secretive as it gets. The names mooted to be part of it reads like the who’s who of business yesterday, today and tomorrow.
They, whoever they may be, are not available for comment. A press release simply reads “Our aim is to assist with the selection of the top jobs in the largest corporations on the planet, we think the least that we could do is to be discreet about it. Nothing can be gained from running these affairs in the public eye.”

2008: A grueling test
Nothing remains a secret forever. There is an increasing number of CEO candidates in the market who have been through the selection process of Select International (SI), and who have been found wanting. Needless to say these guys are bitter and have nothing good to say about the process or the company. Select remain impervious to criticism and continue their policy of discretion above all.
What do the candidates say about the process?. It is grueling, says John Green (an assumed name). The candidates are pitted against each other for a two week period, in complex scenarios looking forward 5 to 10 years and even longer. The curved balls are fast and furious. There is deliberate stress added and continuous psychological and psychometric testing and evaluation, by a team of experts and practitioners, who monitor and participate over the duration of the two weeks. It is also clear that company politics, culture, policy and other specifics are added to the simulations based on who the client is.
In the end, every decision and its outcome, good or bad, is analyzed. The aim is to see who leaves the simulation company in the best position overall, which includes sustainability, ethics of the decisions, the errors made under stress and duress, and so on.
Is this then the shape of things to come? It is clear that it is not popular with many of the candidates, but maybe it is time to raise the ‘game’ to a new level.

Warning: Hazardous thinking at work

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