Ever since the board of General Motors ousted CEO Robert Stempel in 1992, boards of directors have been more willing to act when a CEO falters. The demands on CEOs are ever increasing, and with the pace of change accelerating, errors in strategy or execution are more frequent and more visible. Impatient investors demand action when a sustained, deep drop in stock price goes unaddressed by management. Thus a growing number of boards find themselves having to choose a new CEO -- often with little firsthand experience, increasingly in the midst of company turmoil, and sometimes on the heels of a previous bad hire.

Xerox forced out Richard Thoman just 13 months after making him CEO. Apple Computer went through three CEOs in quick succession before Steve Jobs returned to set the company straight. Coca-Cola, Philip Morris, and Toys R Us have had to fill their CEO slots twice in less than three years. Mattel's Jill Barad held the top job for just two years before investors made their lack of confidence crystal clear.

Those who must select a new CEO -- namely, the search committee of the board (the outgoing CEO, if he or she is in good standing, and three to five board members, most of whom should be active CEOs) -- know what's at stake. Selecting the wrong person does damage to investors, employees, and the organization as a whole. In the worst case, it can cause a depletion of talent at the top and serious loss of credibility on Wall Street or among other important constituents.

Define What You Need

Many CEO searches are doomed before they begin for one simple reason: they start with people rather than with the requirements for the job. Some CEOs have a candidate in mind to succeed them. They may have invested years grooming the person through job rotations, coaching, and exposure to the board. When succession planning begins in earnest, they quickly jump to the specifics of handing over the baton. Board members, too, tend to fix on a handful of people, typically people they've known for years inside the organization.

Especially when the inside candidates have been successful and are well liked, succession seems automatic. But succession is an opportunity to reassess the company's overall position and future direction. The board should take a broad and forward-looking view of the business landscape and the company's emerging needs.

This job cannot be delegated. Thorough discussion of the company's needs will create a different set of criteria from the laundry list offered up by even the most respected executive recruiters. Some criteria will always appear, of course. Every company needs a CEO with high integrity and the ability to communicate and motivate people, for instance, and a CEO must not only meet the current criteria but also show an ability to grow into the job and adapt as the environment changes. Business acumen is also becoming a prerequisite for CEOs of for-profit organizations (see sidebar, "The First Criterion: Business Acumen").

However, other leadership skills that can make or break an organization are unique to the business. Every company's situation is different, and therefore the criteria for its CEO should be identified each time the succession question comes up. Does the company have a great strategy that needs to be executed? Is it at risk of being overtaken by nontraditional competitors? Is the industry converging, diverging, or consolidating?

For example, one large manufacturing company had been deriving nearly all its revenues from the United States but found demand slowing in its domestic market. Globalization was key to continued growth and shareholder value creation. Therefore, the search committee specified that the new CEO should have "significant international experience that will enable him or her to capitalize on global opportunities and/or reduce risk accordingly." This criterion was non-negotiable; any serious candidate had to have a demonstrated record of globalizing a company.

Another company had delivered below-expected earnings for several quarters, despite repeated reassurances that better returns were just around the corner. Wall Street analysts had begun to question the viability of the strategy (which was in fact sound) and whether the company had the wherewithal to pull out of its slump. The search committee realized that the new CEO would have to be perceived as a person who delivered on promises and could communicate effectively with investors. There was little time for learning. It specified that the new CEO should have "a reputation for managerial excellence with Wall Street, or who could be expected to swiftly build a reputation for managerial excellence with the Street."

One company was losing a CEO who had crafted a program to continually drive down costs. Changes inside the company had been hard won, and now employees and investors were gaining enthusiasm as results were beginning to materialize. The board wanted to see the momentum continue, so it specified that the new CEO should have "a sufficiently flexible management style to continue to build on key strategies that have largely driven success to date, specifically, low-cost sourcing and global logistics."

Look Inside and Out

Directors and outgoing CEOs often assume that hiring an inside candidate will lower the risk. They feel more comfortable going with a known quantity. Although knowing the candidate well is an advantage, the search committee should always compare insiders and outsiders -- if only to boost their confidence in the final decision. One large telephone company had a strong internal candidate but also identified a strong outside candidate from a large technology company. After rigorous interviewing and comparison, the search committee ultimately selected the insider. That decision turned out to be a good one -- the outsider flopped in two other companies and the internal candidate did a superb job.

Anxiety about going outside is understandable. Recruiting a CEO from another company does indeed have its risks. Even with a stellar reputation, how the chosen candidate will fit in a new organization is always a question. And bringing someone in from outside can be quite costly. Companies that are viewed as good sources of talent work hard to retain their up-and-coming leaders, and generous compensation is part of the allure. A 45-year-old business unit manager in one large, well-respected company had a compensation package of roughly $1.25 million base pay with up to 100 percent bonus, $25 million in restricted stock, another $25 million available when he retires at age 65, plus stock options.

Often, however, risk notwithstanding, boards and incumbent CEOs have no choice but to look outside for leadership talent. If, for instance, the organization is small and therefore has few internal candidates (and little opportunity to test them), it will have to recruit an outsider. Likewise, if the heir apparent is hired away at the eleventh hour or suddenly reveals a fatal flaw, the search committee may have to look elsewhere. Both Merck and Praxair lost their top succession candidates late in the game. Some large organizations will have to look outside because of earlier cost-cutting efforts that eliminated executive development programs, reduced many senior-level jobs, and drove some high-potential leaders to seek greener pastures.

Sometimes an outsider is simply the best person for the job. (See the box, "Insider or Outsider?") Despite a company's efforts to groom a successor, the inside candidate does not always possess the skills, experience, or perspective the company needs at the time, perhaps because those needs have changed. Xerox, IBM, and Hewlett-Packard all had succession programs that were admired and benchmarked by others, yet when it was time to appoint a new CEO, they had to go outside to find a leader with the particular strengths called for at the time. Sometimes the organization needs a leader who is psychologically removed from past practices, which almost always means an outsider.

Evaluate the Total Person

How do search committees know when they've found who they're looking for? Evaluating CEO candidates requires a great deal of information on the person's achievements and experiences -- and more important, an understanding of the candidate as a total person. There is no such thing as a perfect human being, and little chance that the search committee will find someone who meets every criterion they've specified.

The important questions are, Does this person meet the most important criteria? How has this person demonstrated the ability to deliver what is promised? What are this person's blind sides? Job histories and glowing but superficial recommendations do not provide a well-rounded view of the candidate.

Despite the good intentions and personal accomplishments of search committee members, a surprising number fall victim to several common pitfalls in evaluating CEO candidates: (1) they tend to go easy on candidates, (2) they defer to headhunters (particularly when evaluating outside candidates), and (3) they succumb to the "halo effect" -- the tendency to think that any executive from a "good" company is CEO material. Because companies like GE, AlliedSignal (now Honeywell), Textron, and Emerson Electric have a way of developing business-minded leaders, their executives are often courted by headhunters. Board members sometimes say things like, "Let's get someone from GE or Emerson because those people know how to make money." Although such companies are good sources of leadership talent (just as some older, entrenched companies should be avoided), every individual requires scrutiny.

Evaluating insiders is relatively easy, but familiarity can be deceptive. Chances are directors have seen the person in a variety of settings -- on social occasions, making board presentations, and so on. But their knowledge of the candidate may be incomplete. Search committee members must reflect on whether they have a total picture of the individual, and they should thoroughly discuss the candidate to test whether their impressions of the person are correct.

Search committee members should insist on in-depth discussions with each outside candidate. The typical practice of meeting over dinner for an hour or two is grossly inadequate. The time is too short, and the venue is more conducive to polite social conversation than to the kind of intellectual probing that yields insight into the person's mind.

Directors too often touch superficially on the "soft" side of leadership, the hardest part of a CEO job. They ask questions that barely scratch the surface of leadership style, chemistry, and maturity. Nor do they spend enough time finding out what the candidate has actually accomplished and how. If something doesn't sound right, they keep quiet so as not to offend the person, particularly if the candidate is from a "good" company and is being pursued by others.

Questions should have enough rigor to give the search committee a good understanding of the candidate's strengths -- and weaknesses. Everyone has them. For instance, if the candidate would be leading a large public company, find out how she or he feels about building a relationship with Wall Street. One newly hired CEO hated that part of the job, but no one knew that until after the appointment. Some shortcomings are easy to remedy. For instance, one board encouraged the CEO to hire a vice chairman to handle government relations because the CEO was weak in that area.

A Crucial Role for Boards

With the appointment of a successor comes a new challenge for the board: helping the new CEO achieve success quickly. A new CEO must take hold of the organization and the board early on and create momentum.

One way the board can help is through coaching. When a well-known high-tech company hired a new CEO in late 1999, the search committee ensured that two directors would be on call for coaching, mentoring, and use as a sounding board. In some cases, asking the retiring CEO to resign from the board helps the new leader take hold sooner.

Combining a rigorous selection process with well-honed instincts about people increases the odds of choosing the right person for the job. Helping the new CEO build momentum increases the chances that he or she will be successful in it.