Leader Selection Science: Better than a coin flip

By Dr. Ralf Biele

The enormous price fluctuations in the energy markets have a direct impact on the earnings of many municipal utilities, for which their profits are often indispensable. Higher demands are also accelerating the personnel merry-go-round in the industry, and especially in management boards, which are crucial to get right. A focus on the success factors of the position and a scientifically sound selection can help.

It is and remains a horror story: across all sectors, far too many newly appointed managing directors and board members fail. Even the industry association of Executive Search consultancies (AESC) supports research that almost every second manager is no longer in his new post after 18 months at the latest. It does not matter whether someone was promoted internally or recruited from outside. This should alarm the personnel decision-makers in the municipalities who are currently looking for a new managing director for their municipal utilities. Whether the new person will bring the desired success is as certain as the choice between heads or tails in a coin flip: 50%.

This is not exactly reassuring. After all, many cities and municipalities depend on the success of their energy supplier's management to finance other municipal tasks. Last year, some cities even had to compensate for the losses of their municipal utilities after the managers miscalculated the purchase of electricity and gas. No wonder, then, that the personnel merry-go-round is turning faster.

However, the price fluctuations in the energy markets are not the only reason why the demands on the management of municipal companies have increased. With the shortage of skilled workers and digitalisation, there are two other challenges needed to be mastered in addition to the operational business. Since many candidates today think twice about whether they want to trade a secure job for a potential “hot seat”, the market of suitable personalities is manageable. The upcoming generational change, especially in central Germany, makes the selection situation all the more acute. And some candidates have ideas about remuneration that go beyond the scope of a municipality. And if the municipality is unlucky enough to be located in a region that is less attractive for applicants, it will be tough.

The costs of wrong decisions weigh heavily

Apart from the narrowing market for executives, there is another argument in favour of a professional approach to their search and selection: the enormous costs of a wrong decision. If you add up the cost of hiring, the remuneration during the employment, the investment in the executive, his or her severance pay when the contract is terminated, and the cost of finding a new executive, you quickly come up with three times the planned annual salary.

Even more serious are the additional personnel costs and productivity losses caused by incompetent leadership. This is because poor leadership lowers employee motivation and increases turnover at all levels. Economists put the human cost of a bad leader at least six times their annual salary. Also high, but difficult to quantify, are the market and reputational losses that bad decisions cause. Economists attribute about 45 per cent of a company's brand value to its leaders. The true bottom-line cost of a failed recruitment can be up to thirty times their annual compensation. For a managing director with an annual salary of 140,000 euros, this corresponds to a loss of 4.2 million euros. High-performing managers contribute significantly to their company's profits because they motivate and promote employees, recognise opportunities early on and make the right decisions. But what do you do if the chance of success in hiring a good manager is only that of a coin flip – and the cost of a bad investment could run into the millions? Wouldn't it make sense to take measures to reduce the risk?

The four most common mistakes made by headhunters

The idea of contacting a professional headhunter to solve your hiring needs surely comes to mind. But their conventional Executive Search methods have four weaknesses: First, headhunters usually only have a limited pool of candidates they know personally and can assess. This goes as far as the statement of a former headhunter who seriously asserted that only the people in his address list were suitable for the board.

The second trap lurks in personal evaluation and selection based on past performance. However, old merits are no guarantee of future success, all the more so in rapidly changing markets. On the contrary: the methods with which a manager was successful in a particular context in the past can have a counterproductive effect in the new situation. In addition, looking in the rear-view mirror ignores a crucial criterion for success: A person's potential to be up to a task he or she has not been confronted with before.

The third mistake lies in stereotypical ideas of good management. Whether a manager's personality helps a company or not also depends on his or her task and the respective company situation: In which phase of the company's development, in which market environment and under which opportunities or risks does a person have to prove himself?

A fourth source of error is the subjectivity of human judgement. In his book "Noise", which is well worth reading, the American psychologist Daniel Kahnemann describes the factors that distort our decisions. These are commonly referred to as noise. Kahnemann writes that the results of selection interviews often depend more on the interviewer than on the candidate being evaluated. This is also true in the selection of directors for public utilities and other municipal holding companies: any bias, stereotyping or ignorance is a subjective and thus judgement-distorting factor.

The right choice with MU Leader
Selection Science®

The good news is that there is an evidence-based assessment that can significantly reduce the above-mentioned sources of error. Because this is precisely where a well-structured selection process backed by scientific methods comes in. This significantly increases the probability of finding the managing director or board member who fits the company and the task.

The first step on this path is a clear analysis of what is expected of the person being sought in the first place. For this, three questions need to be answered:

  1. What results does the company expect from its managing director or board?
  2. What is the initial situation and the framework conditions under which the leader has to perform?
  3. What tasks does it have to fulfil successfully?

The answers to these three questions form the basis for finding the best candidate. However, a good counsellor will also engage with the client if A, B and C do not add up to a coherent picture.

In the second step, the potential candidates are assessed with the help of proven scientific assessment methods to see whether their personality, abilities, motivation and skills match the requirement profile. The greater the match, the smaller the compromise and the more likely the person can meet the requirements and be successful in the position.

Years of experience show that filling a position with a structured and scientifically based selection process increases the probability of success to more than 90 per cent. Who would still want to rely on the toss of a coin?