Korn Ferry: Predicting CEO Performance

Boards of directors face no more fundamental responsibility–and none that is more closely watched–than hiring a new CEO. And no other single action that directors take can have a greater impact, positive or negative, on a company’s value.

Published studies show that 40% of CEOs fail within their first 18 months, and the cost of replacing a failing chief executive can range from $6 million to $18 million, according to new research by the Korn Ferry Institute. It’s no wonder that directors seek every tool at their disposal to aid in making a highly informed decision.

“The science of CEO assessment has made significant strides,” says Stu Crandell, senior vice president, KFI and Global Solutions. “Key indicators can be measured before CEO candidates are hired that will help predict their tenure and company financial performance.”

Korn Ferry Hay Group’s CEO Readiness Assessment is designed to measure these key indicators, and includes multiple simulations designed to mirror typical challenges a new CEO faces. All of these elements provide a critical understanding of how candidates would perform as CEOs.

The key objective of this assessment is to gain a rounded view of a candidate’s personality and abilities aligned with the real-life conditions CEOs must operate under every day. This is crucial–since candidates are more often than not internal successors–because boards often assess and predict candidates’ performance in a position they likely never held. To quantify outcomes of the CEO Readiness Assessment, the Korn Ferry Institute has analyzed the firm’s hiring assessment data for 118 candidates who later went on to be CEOs. A second study included the original 118 CEOs plus 44 more CEOs, totaling 162 executives who had become CEO.

The studies show that high-scoring CEOs on the assessment outperform low-scoring CEOs on three key financial outcomes: revenue, market cap, and earnings per share. Even small differences among potential CEOs may matter. If a CEO candidate, for example, measures just one point higher on a five-point scale in the competency manages complexity, the data show that the companies see:

• 83.3% increase in market cap
• 77.8% increase in earnings per share
• 17.6% increase in revenue

A key reason may be that better assessments lead to longer-tenured CEOs. The study found that high scorers on the overall assessment who went on to become a CEO served an average of 67% longer as CEO–6.1 years, compared with low scorers’ tenures of 3.6 years (against a benchmark of 4.6 years of Fortune 500 CEOs overall).

To read the full report, click here.