As Ceo Heads Roll, Recruiters Ponder The Implications For Search

CEOs come, CEOs go. Turnover in the corner office is nothing new to search industry constituents, who make a living from change at senior levels. Lately, though, the ouster of leaders at the nation’s largest companies has picked up pace. Chiefs at 39 of the biggest U.S. companies (by revenues) have left their posts so far this year (see table page 8), according to executive compensation consultants Pearl Meyer & Partners, Inc., an increase of 69 percent over the 23 departures in 1999. One result: recruiters and corporate governance experts are mulling over the reasons why these changes are happening now. Perhaps more important, they ask, what are the implications for the search industry in the months ahead?

Finding a single cause of the recent escalation in chief executive departures is difficult, if not impossible, because every company’s situation is different. Yet, an analysis of this year’s corporate turnover reveals a few of the factors behind current tumult at the top.

Industry Sector: Change at specialty retailers, a group that includes J.C. Penney, Kmart and Sears Roebuck, was disproportionate (six of 39), largely due to flat growth, significant competition and the need for fresh ideas. Two of the three changes at healthcare companies (Aetna and PacfiCare) resulted from demand for different leadership skills and experience in the chief. Dr. John Rowe joined in September prior to the spin-off of Aetna’s managed care business into a separate company. PacifiCare’s CEO Robert O’Leary resigned after only three months onboard, saying "my skills and background are not a good fit."

Merger-and-acquisition activity: Disappointing return on investment after an acquisition or merger is an increasingly common catalyst for turnover. A major factor in Bank One’s ouster of 18-year company veteran John McCoy were difficulties in combining his company with First Chicago NBD Corp. Though neither Mattel Corp. or Newell Rubbermaid appear on Pearl Meyer’s list, post-acquisition problems and resulting drop in stock price led to the departures of CEOs Jill Barad and John McDonough, respectively. "A misstep in mergers-and-acquisitions has probably led to at least a third of recent turnover problems," says SpencerStuart’s Dennis Carey, a founder of TheMAGroup.com, an organization whose membership is comprised of "highly acquisitive chief executives."

Execution in organizational change: Problems of this sort were significant factors at consumer products companies Gillette and Procter & Gamble, despite the long track records of leaders, Michael Hawley and Durk Jager, respectively. Board members and shareholders forced Mr. Hawley out "to bring in someone who could make things happen faster," says search consultant Bill Willis, president of William Willis Worldwide, who has worked extensively for Gillette. In contrast, former P&G CEO Durk Jager resigned under pressure in July after trying to do too much, too soon. "The company couldn’t handle it," says John Bassler, a Korn/Ferry managing director and former P&G executive, and earnings and share price suffered.

Unforeseen impact or requirements of new technologies: Examples fall into two categories. At Lucent Technologies, an oft-stated reason for the departure of chief Rich McGinn was his underestimating the market’s appetite for high-speed optical equipment. The November exit of Robert Knowling from Covad Communications, a provider of highspeed Internet connections not on the Pearl Meyer list, is different. Mr. Knowling did not anticipate the difficulty of installing equipment and connecting customers.

Many industry observers believe these factors will be a continuing presence in the months to come. Tougher performance demands from Wall Street are one reason. "If you didn’t have such an extremely volatile stock market right now, it wouldn’t be so bad." says Pearl Meyer managing director Rhoda Edelman. Globalization is another. SpencerStuart’s Mr. Carey believes that mergers and acquisitions will continue, resulting in "a world with three or four global supernationals in each industry where there used to be 25."

One approach for making lasting chief executive placements is to work closely with the board. An effective board should create and implement a development plan for a CEO, says Rick Steinberg, partner in the Corporate Governance Practice at consulting firm PriceWaterhouseCoopers. Such a plan includes performance targets linked directly to corporate strategy, from achieving earnings forecasts to promoting product innovation or retaining skilled employees. "Taking action isn’t always an easy task for boards, because directors haven’t had the experience," he says.

Colleen Hulce, a Korn/Ferry International managing director who has recruited for such global entities as Dole Food and Nike, agrees. Borrowing a term from Nike, she recommends directors think in terms of a "success profile,’’ for their leader. "Analyze what’s necessary – don’t just mimic what you’ve read in the newspaper. Education and achievement are important, but it should also include the intangibles, like leadership and integrity." Comments Jeffrey E. Christian, head of Cleveland-based search firm Christian & Timbers, "Companies tend to hire for experience and fire for human qualities, so they end up compromising on the stuff that’s really important, like intelligence, integrity, leadership, which are critical for success. I’ve been trying to coach my clients on that way of thinking."

Management Assessment Practices Aim To Bring Science To Art Of Search

Fifty-four years after Sidney Boyden left management consulting firm Booz-Allen to start Boyden International, retained search is getting back to its consulting roots. A host of Boyden’s modern-day competitors, including Russell Reynolds Associates, Korn/Ferry International and Heidrick & Struggles International, are launching management assessment practices. Arguably more closely tied to traditional management consulting than to headhunting because of the service’s highly consultative nature, management assessment attempts to make "this thing, search and assessment, that is an art, into a science," says Peter Drummond-Hay, who is overseeing Russell Reynolds Associates’ foray into the area.

Though each firm’s offering has unique components, all of these leadership assessment services are founded on a similar concept: that competencies, initiative, skills and values of individuals can be assessed and quantified, thus enabling comparisons between employees in selected areas. "We aren’t selling a computer model," emphasizes Joanna Miller, who heads Korn/Ferry International’s management assessment practice in North America. "We are selling the judgments of Korn/Ferry partners."

Like Korn/Ferry, Heidrick and Russell Reynolds assign two search consultants, each trained in appraisal interviewing techniques and one of whom is frequently a functional specialist, to every employee being assessed. Post-interview, the consultants rank and rate each individual on a number of predetermined competencies, then compare answers to arrive at a final judgment. These qualitative calls are then translated into a number: for instance, "average" might equal a numerical "five." Says Heidrick & Struggles’ partner Greg Carrott, "This is a logical business for search firms, because it allows us to bring our knowledge of an industry, or of a function, to bear in an assessment." Evaluations also include 360 degree referencing, in which consultants seek input from an individual’s colleagues, direct reports, and superiors. Heidrick, Korn/Ferry and Russell Reynolds all offer the option of psychometric testing, often via strategic partnerships.

To be sure, management assessment is not new. Some search firms, including Egon Zehnder and Korn/Ferry, have long sold these services in Europe. Four years ago, SpencerStuart launched the firm’s Global Intelligence business in America; it now contributes about 10 percent of the firm’s domestic revenues. SpencerStuart is building GI’s presence, and plans to announce a senior-level hire soon.

Most of the search firms keep details on assessed executives separate from candidate databases and establish an off-limits policy with clients. Firms see the service as a sensible extension of recruiting and a source of new revenues from consulting on retention and employee development. Says Russell Reynolds’ Mr. Drummond-Hay, "part of retaining employees includes knowing what they need."

Retail Recruiting Chief Harold Reiter Is An Accidental Trendsetter

Long before joining venture capital firms as a recruiting partner became the de rigueur career move for retained executive search consultants it is today, Hal Reiter left a partner post at Korn/Ferry International for Butler Capital, a management buy-out firm with over $1.5 billion in committed capital. As a managing director, Mr. Reiter oversaw recruiting for two dozen portfolio companies ranging from McDonald’s supplier Golden State Foods to Julius Koch, a maker of cords and tapes for Venetian blinds. He regularly hired the likes of SpencerStuart, Russell Reynolds Associates as well as Korn/Ferry. "I think [Butler Capital founder] Gil was ahead of the curve to hire me in that role," he says now. "But if I was a trendsetter, it was inadvertent."

At Butler, Mr. Reiter met numerous recruiters, including Herbert Mines, head of his eponymously named, retail-focused boutique. Back in 1993, Mr. Mines broached the possibility of Mr. Reiter joining the company as heir apparent. Intrigued but somewhat wary, Mr. Reiter agreed to consider the idea. "Herb was, and is, an institution in search," says Mr. Reiter today. "But the country is littered with the bodies of chief operating officers who don’t work out." Six months of discussions convinced him of Mr. Mines’ serious intent, and Mr. Reiter joined as a majority shareholder with a five-year succession plan.

Now CEO, Mr. Reiter continues blazing industry trails. The Manhattan-based, one-location firm, whose work is predominantly in retail and consumer goods, ranks among the nation’s largest 25 by revenues. With fewer than 20 recruiters, Herbert Mines Associates regularly completes marquis assignments: placements include Eckerd Corp. CEO Wayne Harris, Ann Taylor president Patti De Rosa and most recently, Charles Conaway at Kmart. Revenues for this year are expected to reach nearly $20 million, a significant rise from the $4.5 million in annual sales when he started.

Operating at such high echelons in the tight retail world has some downsides, such as Federated Department Stores’ 1998 lawsuit against HMA, accusing the firm of tortious interference in recruiting executive Matt Serra to Foot Locker. The suit, ultimately dismissed, was closely watched for its potentially precedent-setting outcome. How does a small shop generate such notoriety? "A combination of serendipity and bad luck," says Mr. Reiter, a non-practicing attorney, dryly.

One fashion he’s bucked so far is selling the boutique to a large global player as others retail recruiting shops have. "He’s not been coy," says HMA partner Gene Manheim, a longtime friend of Mr. Reiter. "He hasn’t fished for offers, He’s very open." An Oregon native, Mr. Reiter’s relaxed personality is reflected in his leadership style. After several years at HMA’s helm during a time of frenetic growth and change, he recently hired an industrial psychologist to interview employees and hear feedback. "I want people here to be well-renumerated and to be happy," he explains, asking rhetorically, "Without that, what’s the point?"

Larry Imely: An Architect Of The New Human Capital Management Model

ESR: When you joined StratfordGroup in 1996, you’d spent four years at Christian & Timbers, a fast-growing firm that was developing a strong reputation, particularly in technology-related assignments. What appealed to you about joining a little-known company?

Imely: When I left Christian & Timbers, the company I joined was not StratfordGroup, but a firm called AIM Executive, based in Toledo and begun by a college classmate of mine, Jeff DePerro. AIM’s predominant revenue stream came from contract and contingency staffing. Executive search was small. But Jeff wanted to expand and somehow take his company into the public arena. He was in discussions with several companies then.

ESR: How did AIM Executive become Stratford Group?

Imely: AIM had a small executive search capability formed in the early 1980’s whose name we changed to StratfordGroup in 1996. With offices in seven cities throughout the U.S., we began to hire consultants from other firms nationwide. The Juntunen-Combs-Poirer and Bridgegate groups were merged into StratfordGroup in late 1998.

ESR: So you left Christian & Timbers with the understanding that the firm you’d be leading would most likely be part of a publicly traded company?

Imely: Yes. I believed that many search companies would eventually go public or be consolidated to be able to tap into financial resources. All private firms must grapple with finding funds for expansion, since typically most of the revenue at the year’s end is divided into bonuses for practitioners. I concluded that the public arena would be the ultimate resource. A.T. Kearney Consulting, for example, moved in that direction when EDS acquired it in 1995. I also thought that staffing and human resource consulting firms would begin to converge in an attempt to be more of an all-in-one service to their clients.

ESR: Why did you think so?

Imely: Listening to my customers and to members of our client advisory board.

ESR: What specifically did you hear?

Imely: Clients would typically talk about some of the issues and problems that they were having with their businesses: "Where do I get technology support help?", "How do I manage these multiple searches that I’ve got going on?" and "I would really like to outsource more of my recruiting if I could." Rather than manage 30 vendors, clients wanted a couple of master vendors that would handle a majority of these services on an outsourced basis. That way, instead of being fixed, costs would be variable. When I joined AIM, the company was talking to several organizations in the "human capital management" arena. Interim acquired us in January 1997.

ESR: Blending contingency and retained placement is similar to what TMP Worldwide has done.

Imely: Yes, I think many components of what today is Interim Services, or now Spherion, were well in place before TMP’s were, although I’d be the first to tell you that we didn’t move as fast on our job board model. TMP did a better job of exposing the online recruiting model than we did. But as far as acquisitions go, between the time that Interim Services went public in 1994 and the year 2000, the company completed 30 or so acquisitions, all within the human capital arena. They made a commitment to acquiring outplacement, staffing, consulting and retained search firms.

ESR: Where does StratfordGroup fit within Spherion?

Imely: Spherion’s business is divided into three pieces: professional services, commercial staffing and technology. StratfordGroup is the executive search organization within Spherion, and is part of professional services. We have 18 offices, each of which runs on a profit-and-loss basis. Our 55 search consultants work within a geographic location as well as within an industry practice. Each of the 12 industry practices has a budget, but revenues flow to the office locations where search consultants are located. It’s a matrix model.

ESR: How does a search consultant make money? At TMP Worldwide search, for instance, part of a consultant’s compensation is based on an ability to sell the company’s services in addition to executing assignments.

Imely: A consultant’s primary source of revenue comes from search work fees. Consultants can also earn money by referring a cross-sell opportunity into any other Spherion business. So if they’re calling on ABC Company for a search, and they see that a client has a possible need for a different service, perhaps, outplacement, they can write up a referral lead and get a certain percentage of money on each referral. We all have certain objectives and it has become part of our culture to introduce our peers within the company to new business opportunities on an ongoing basis, quarterly and annually.

ESR: You’ve mentioned that StratfordGroup will be opening offices in London.

Imely: Yes. Spherion recently purchased Norrell, which owned a London-based company, Friedlander Sachs. That will become part of StratfordGroup on January 1, 2001. The company has several consultants focused on lifestyle brands/consumer goods in London. In addition they’ve also developed a consultative program called The Gene Pool Initiative.

ESR: What is that?

Imely: It is a strategic service in which client companies hire consultants to identify top talent in the marketplace in anticipation of an actual need. So we’d be paid on a monthly or annual retainer. Mark Stewart runs the practice and office in London and developed the Gene Pool Initiative concept. He’s looking for a search consultant in the U.S. to manage the lifestyle practice.

ESR: The Gene Pool Initiative sounds similar to the management assessment practices many U.S.-based search firms are launching now. Another trend among search firms is aligning with venture capital funds. What is StratfordGroup’s philosophy in working with VCs?

Imely: At this point, StratfordGroup, as a Spherion publicly held company, will not take any ownership stake in a company. However, a consultant may hold stock in a company for which StratfordGroup performs search work. For instance, if I want to do an assignment that has a $100,000 fee, and I want to take half of my fee in founders stock or in options, the company puts a value on it and then I must pay StratfordGroup for it. Otherwise, StratfordGroup and Spherion lose out on their fees. I do think that venture capital firms may start to look for more alliances and dedicated partnerships with search firms, and we’re looking into how we might collaborate with VCs in the future.

ESR: As search firms including StratfordGroup increasingly offer services that are, as you call them, "consultative," rather the traditional pay-for-an assignment, transactional services of today, won’t the structure of consultants’ pay change, too?

Imely: Possibly. It’s a little like building a new house right next to an old one. The old building, a little dilapidated but fully occupied, generates rent. Next to it is the new building. During construction, the new structure costs more, and until it is finished, you must invest in it. When it is complete, you have to decide whether to annex it to the old building and then renovate the old building, or simply tear the old place down. I think that’s the transition we’re currently facing. Not only is the traditional, transactional model difficult, because you sell-and-search, sell-and-search, but also because it isn’t necessarily the best partnership for both parties when a consultant is under pressure to try to fill an assignment with the best person in the shortest period of time. We think more companies are saying, align with us, be our partner. They’ll pay a retainer to use us for market analysis and positioning, understanding their organizations, accessing talent and recruiting A players to their companies.

Heidrick & Struggles Reports Third Quarter Earnings

Earnings of executive search firm Heidrick & Struggles for the period ended September 30 were 51 cents per share on a diluted, adjusted basis on revenues of $148.1 million. Earnings increased 16 percent from the 44 cents per share reported in the same period one year ago on revenues of $114.9 million. Revenues for the executive search business were $142.3 million in the third quarter, up 25 percent from the $114.3 million in the 1999 third quarter.

Most Directors Nixed Board Offer Last Year

Prior experience as a corporate director is the background preferred by companies seeking new board members, but the majority of directors today are rejecting offers to take on an additional commitment. The reason: time. That’s one of the findings published in Korn/Ferry International’s recently released 27th Annual Board of Directors Study. The 1000-plus responses from directors of Fortune 1000 companies reveal that directors spend 173 hours annually per board, a major factor in 60 percent turning down an additional board invitation last year. "Since companies prefer directors with board experience, this trend is having a definite impact on availability and choice of new directors,’’ says Peter Crist, Korn/Ferry vice chairman and head of global board services.

Lucent Retains Spencer Stuart For CEO Search

Following the October 23 resignation of chief executive Richard McGinn, Lucent Technologies has hired executive search firm SpencerStuart to recruit a successor, according to a Lucent Technologies spokesperson. Henry Schacht, the company’s CEO until 1997, is serving as chief executive and chairman while the search is conducted.

Martin Partners Recruits Adwise Chief Executive

Dan Schwartz is the new chief executive of Adwise in New York City. Recruited to the online advertising firm by Chicago-based executive search firm Martin Partners, LLC, Mr. Schwartz, most recently vice president of North American sales at advertising infrastructure company Adforce, will be responsible for overseeing the strategic direction and international expansion of the company, which has offices in Seattle, France and Israel.

Ray & Berndtson Places High/Scope Foundation CEO

Fort Worth, TX-based Ray & Berndtson has recruited Dr. Arthur Stellar to the High/Scope Educational Research Foundation as president and chief executive. Dr. Stellar, most recently the superintendent of schools in Kingston, New York, assumes his new position on January 1st, 2001. He succeeds Dr. David Weikart, the president and founder of High/Scope, a nonprofit research, development, training and public advocacy organization based in Ypsilanti, MI. Angela Henry and Abe Claude of the firm’s New York office conducted the assignment.

Heidrick & Struggles Finds Dell Computer Director

Consultants at retained search firm Heidrick & Struggles International have recruited William H. "Bill" Gray III, president and CEO of the United Negro College Fund since 1991, to the board of directors at Dell Computer Corporation. Mr. Gray currently also serves of the boards of EDS, Chase Manhattan Bank, Rockwell, Viacom, Visteon, and Warner Lambert.

JB Homer Associates Lands Online Investment Services

Executive search firm J.B. Homer Associates, based in New York City, is recruiting an executive vice president, global technology for On-Line Investment Services, a provider of electronic securities trading services. The successful candidate will report directly to the CEO and founder, Greg Hold, and will be responsible for providing strategic technology leadership to the organization.

Villeneuve Places Two At Hollywood Entertainment

Seattle-based executive search firm Villeneuve Associates has completed two searches for Wilsonville, OR-based Hollywood Entertainment. Scott Schultze, a 20-year veteran of the retail industry who has worked at the May Company and the Limited, assumes the title of chief administration officer. Robert Peterson is the firm’s new chief information officer, and is charged with building and maintaining the company’s information systems. Mr. Peterson was most recently senior vice president and CIO at Office Max. Kim Villeneuve, founder and CEO of Villeneuve Associates, led the assignments.

Repovich-Reynolds Group Completes EDS Searches

The Repovich-Reynolds Group has completed a number of search assignments that are part of an ongoing project at client firm EDS Corp., having placed six public relations professionals in EDS' corporate communications department: Tom Mattia, formerly VP of public affairs at Ford Motor Co.'s Lincoln Mercury division, as vice president of global corporate communications; Jeffrey Baum, most recently director of financial media relations at Lucent Technologies, as director of PR/global marketing; John Clendening, former director of media relations at AlliedSignal, as director, line of business and industry group public relations. Peter Rowe, formerly media relations manager for financial and labor at Delphi Automotive Systems Corp., is director of information solutions public and market relations, while Stephen Holder, formerly senior director of public relations for retail markets at U.S. West is EDS' director of global financial industry public relations. Finally, James Baptiste, formerly general manager at GPC/O1Neill & Associates, is now EDS' director of northeast regional communications.

Stanton Chase Recruits International Hospital CEO

The Dallas office of retained search firm Stanton Chase International has recruited Christopher Chatten to International Hospital Corporation as chief financial officer. Most recently director of finance at De La Rue Cash Systems, Mr. Chatten previously worked at Human, Inc. for nine years. Dallas-based International Hospital Corp. operates three hospitals in Mexico, one in Costa Rica and also owns a hospital development company in Brazil.

A Delightful Journey As An Industry Returns To Its Roots

Not too long ago I attended an event, hosted by the International Association of Consultants and Professional Recruitment, on the topic of talent. Beth Axelrod, a principal at McKinsey & Co., the firm that popularized the phrase, "War for Talent," presented updated research to a spellbound audience. Near the end of her talk, Ms. Axelrod commented on the important role search consultants play in helping client companies shape a corporate culture and cultivate talent. As I stood in line to speak to Ms. Axelrod afterward, I heard consultant after consultant say, "It’s so nice to hear. This is what search is about."

If recent events as outlined in this month’s cover story provide any clue as to what might happen in the near future, I’d wager that the collective consulting abilities of this profession will be put to good use in the coming years. Chief executive churn at large U.S. companies may well continue, if Wall Street volatility and competitive pressures to build a global presence remain. More corporate directors, hoping to prevent turnover in senior management, may well seek out the services of executive recruiters. "Boards don’t do searches every day," notes Gerard R. Roche, vice chairman of Heidrick & Struggles International. "The decisions they make deal with the human element, and it is an inexact science, if it is a science at all."