Companies relying on more advanced forms of CEO assessment may see significant gains—as high as 80 percent in market cap alone, this is according to recent studies conducted by Korn Ferry.
The findings are based on the results of two separate studies by Korn Ferry. Each center on the company’s recently enhanced CEO Readiness Assessment program, that evaluates an array of competencies, ranging from the CEO’s ability to handle ever-growing complexities on the job that requires inspiring staffers and building trust.
“These assessments give a picture of the candidate’s personality, competencies, cognitive ability, motivations and behaviour under stress, which are all critical to understanding how the candidate would perform in the CEO role,” said Stu Crandell, senior vice president of the Korn Ferry Institute, the company’s research arm.
“With the intense scrutiny boards of directors are under when choosing a CEO, the assessments are an invaluable tool and highly predictive of a candidate’s success in the role.”
In a pilot study last fall, the Korn Ferry Institute analyzed its hiring assessment data for 118 candidates who later went on to take the CEO seat. The second study was completed in the spring of 2016 and included the original 118 CEOs plus an additional 44 CEOs, totaling 162 executives who had become CEO.
The results demonstrated 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. According to the data, if a CEO candidate measures just one point higher on a five-point scale in the competency, manages complexity, companies see:
According to the second study, better assessments lead to longer-tenured CEOs. The research also finds that, CEOs who took the Korn Ferry assessment and later went on to become a CEO, high scorers on the overall assessment served an average of 67 percent 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).
“It’s important to note that while there is no precise formula for predicting a CEO’s tenure or financial impact, there are robust assessment tools and methods that can dramatically improve a board’s chances of selecting a CEO who will succeed at the helm long enough to drive sustainable financial performance,” said Jane Stevenson, Korn Ferry’s Global Leader for CEO Succession.
The results are just the latest example of companies around the globe turning to more innovative, sophisticated methods for hiring their most valued—and typically highest paid— leader. Much of the effort has been directed at curtailing CEO turnover, which hit a six-month high in December and has periodically surged since.
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