‘Massive bias’ stops advisers becoming bosses

Company directors are often hesitant about hiring a management consultant to be their chief executive. Perhaps they have the occasional rare but horrifying experience in mind, such as that of Enron, the former energy trading company, and Valeant, the Canadian drugmaker.

Enron’s collapse in 2001 led to the jailing of Jeffrey Skilling, the former Mc­Kinsey partner who became Enron’s chief executive.

Michael Pearson, who became chief executive of Valeant in 2008, also happened to be a veteran of McKinsey. He built Valeant into one of the world’s biggest pharmaceutical companies, but things started to crumble last year when it was revealed the company had been using a secretive network of mail-order pharmacies to boost sales. Shares are down more than 90 per cent from their peak. A criminal probe has already resulted in charges being brought against a former Valeant manager and the former chief executive of Philidor, a defunct mail-order chain, alleging they participated in an illegal kickback scheme. Mr Pearson stepped down as chief executive in March. He was also given a payout worth more $10m and Valeant retained him as a consultant.

However, disasters are not the norm. Some of the world’s most prominent executives have a background in consulting, such as Sundar Pichai, chief executive at Google (ex-McKinsey), Indra Nooyi, chief executive of Pepsi (ex-Boston Consulting Group), Meg Whitman, chief executive of Hewlett Packard Enterprise, and John Donahoe, chairman of PayPal (both ex-Bain).

Appointing a consultant remains relatively unusual, however. Research by Spencer Stuart, an executive search firm, found that only 5 per cent of chief executives appointed at S&P 500 companies between 2004 and 2010 were of former management consultants with five years or more of consulting experience.

Jim Citrin, who leads Spencer Stuart’s North American CEO Practice, says there is “massive bias” among independent directors against considering consultants: “People make generalisations, they say ‘consultants are not good operators’ or ‘I’ve never seen a consultant be able to implement’.”

He adds: “You should check that bias at the door and be open minded because there is evidence which suggests that they might very well be the right candidates.”

Spencer Stuart found that when consultants did take the helm, they tended to improve a company’s financial performance over the course of their tenure more often than other leaders — 71 per cent of the time versus 42 per cent for those without management consulting backgrounds.

In cases where the company was in “crisis” or “challenged”, the ex-consultants were able to move it to the “stable” or “growth” category 92 per cent of the time, versus 70 per cent for non-management consultants.

Mr Citrin says the best consultants have skills similar to those of chief executives, particularly if they have been a leader in their own organisation — “being the strategic leader of a business, being able to articulate that and communicate that to a board and a leadership team”.

Being the smartest person in the room is not the most important thing

He cites examples such as Gene Hall, the ex-McKinsey chief executive of Gartner, the technology research firm, whom he persuaded the board to consider in 2004. “He has taken the company from $600m in value to $8.5bn in the last 12 years,” Mr Citrin says.

Not all consultants can make the transition: ability to analyse is not the same as being able to make change happen. Mr Citrin says the risk is probably too high if a consultant has not worked in a management capacity.

Chris Williams, reader in management at Durham University Business School, says: “It’s all about the fit between a consultant’s experience and capability and the strategic challenges facing the company.” A consultant with experience of transformational projects for multiple clients can be useful for a company that needs strategic redirection or wants to diversity into new sectors or business lines.

But, he warns, some consultants lack experience of implementation or dealing with the range of stakeholders that a chief executive must deal with, such as employees, trade unions and governments.

Fiona Czerniawska, director of Source Global Research, a consulting industry specialist, says: “Companies hire consultants as CEOs because they’re very smart, analytical people, but they’re only going to succeed as CEOs if they can take people with them — and that requires more than just the ability to present data.”

For consultancies, having former employees running clients’ businesses can bring advantages. Many professional services firms have followed McKinsey’s lead in creating alumni networks in the hope that these will bring more business their way.

For individuals who want to reach the top in business, boards’ bias against appointing corporate advisers suggests that consultancy may not be the perfect route, unless supplemented by operational experience.

Mr Citrin insists, nonetheless, that experience of management consulting is “a great grounding for any kind of professional career later”. For those who make the transition, he warns against intellectual arrogance. “Being the smartest person in the room is not the most important thing.”