Gautam Mukunda

Rolling the Dice

When is it worth gambling on an outside leader?

by Kate Pavao, August 2012

When it is time to pick a new CEO, is it better to promote a smart, qualified manager — or try your luck with a wild card? In Indispensable: When Leaders Really Matter, Gautam Mukunda, an assistant professor in the Organizational Behavioral Unit at Harvard Business School, examines famous leaders in history — from Abraham Lincoln to Jack Welch — looking at how leaders who have been filtered through a careful selection process differ from those who have not.

“The more effort and attention you put into choosing leaders, the higher the average quality of the leader is likely to be,” he tells Profit. “But.. the less likely it becomes that you get the truly great ones who do the things that no one else would ever have done.” Here, Mukunda explains when untested leaders are worth the risk, how to hedge your bets against disaster — and two qualities every great leaders needs.

Profit: When is it the right time to take a risk on an untested leader?

Mukunda: Most of the time you don’t want to gamble on people who make crazy bets — because most of the time, crazy bets really are crazy. Most people who think they are as good at business as Steve Jobs, aren’t. There are so many more ways to fail than there are to succeed

But think about a start-up company. The most likely outcome is the start up will go bankrupt. Well, you’re not going to go any more bankrupt. Your losses are bounded, but your gains are perpetually infinite. You might become Google, Microsoft, Oracle or Facebook. So that’s a situation where gambling makes a lot of sense.

The other time to take a risk is if the organization is really in a lot of trouble. Clearly, then, what you’ve been doing in the past is not working. And if you’re in so much trouble that the most likely outcome is failure anyway again, that’s a situation where you want to role the dice.

Profit: How can organizations minimize risk when picking a leader from outside their organization?

Mukunda: If you’re bringing in this outsider, you don’t have to necessarily give her the top job right away. Bring her into the number two position, in a place where you can watch her and see if this person really is the person you think she is.

Also, just as you know less about her, she know less about how your organization or culture works. When people move from one company to another, even within the same industry, success doesn’t necessarily transfer very well. So you want to surround this outsider with people who know the company well.

Profit: What surprised you the most as you researched your book?

Mukunda: The biggest, most surprising thing for me was how often strong and capable organizations make this incredibly important decision based on shockingly superficial amounts of data. Look at Al Dunlap, who was the CEO of Sunbeam. This guy is probably the worst CEO in human history. And when you look at how he was hired by Sunbeam, it is almost inexplicable that that the directors didn’t do more research.

Success doesn’t really correlate across organizations, but there are some traits that will help you in every organization — and there are some traits that will always cause failure. You at least want to know that this person you are choosing has been evaluated at some company or institution for a long time. If this person built a career, that at least gives you some confidence that he can get the basics right. Even if he is not the right person, he is not completely incompetent.

Profit: What advice would you give today’s leaders as they begin to pick tomorrow’s managers and executives?

Mukunda: Interviews aren’t going to help you that much. We use interviews all the time for everything, but there’s no data that suggests that interviews are all that valuable. What you want to do is talk to the person who has spent three or four years in the same room with your candidate. You want to get in close.

Also, you want to be very careful to think about luck. Sometimes false signals make people look impressive, but when you dive down into their backgrounds, they really aren’t. Perhaps your candidate ran a really profitable division — but if it the economy was booming, everyone ran a profitable division. So what does that tell you about him?

Profit: What characteristics should you look for in a great leader?

Mukunda: What you really need are people who have this extraordinarily combination of extreme self-confidence and extreme humility. They are only going to succeed if they have the confidence to say, “This is the course and we are going to move in this direction.” At the same time, they have to be humble enough to listen to other people around them. When other people say, “This is a really, really bad idea,” great leaders have to take those arguments seriously. It doesn’t mean they have to do what others say, but it does mean they have to listen.

A lot of time when the members of a board of directors tries to hire a CEO, they look for someone charismatic. They think of charisma as being a really great thing, but really charisma is only an intensifier. If this person is good, charisma will make him better, and if bad, charisma will make him worse, partly because he is harder to judge and assess.

Profit: How do you test for this ability to listen?

Mukunda: Ask your candidate to tell you about a time he was wrong. Ask, “Were there other people who warned you, before you made the final decision? Did you listen to that?” No one is right all the time. If somebody told me, “Well, I’ve never been wrong,” I don’t care how great his record is — you can’t take the risk.