The Path To Becoming A Fortune 500 CEO
Eric Savitz, Forbes Staff
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Guest post written by Jeffrey S. Sanders
Jeffrey S. Sanders is Vice Chairman and Managing Partner of the North American CEO Practice for Heidrick & Struggles, an executive search and leadership consulting firm.
Jeffrey Sanders: The road to the top.
While we all know stories of legendary CEOs who seem born to the role, most CEOs are not born, they are made. People who aspire to the role have to seize the opportunity and set a path: to manage their career choices and craft their experience to make them a likely CEO candidate.
What does that path look like? To find out, the CEO & Board Practice at Heidrick & Struggles analyzed the careers of all current Fortune 500 CEOs.
Here's some of what the study discovered:
Develop Financial Acumen
About 30 percent of Fortune 500 CEOs spent the first few years of their careers developing a strong foundation in finance. This is by far the most common early experience of today's CEOs. As the second-largest constituent, CEOs who started out in sales and marketing roles account for only about 20 percent of the current big company CEO population.
The prevalence of CEOs with a strong financial background points to the fact that large companies prefer CEOs who can create value for the company and who understand the company's financial drivers. Typically, companies are looking for CEOs who can develop a strategy and understand the financial ramifications of business decisions.
A foundation in finance is an important building block for a career. However, only about five percent of these CEOs were promoted directly from the role of CFO - more than half were appointed from the role of COO or President. Though the prevalence of Fortune 500 CEOs with strong financial backgrounds underlines the importance of developing financial acumen, above all, companies value a strong operator.
For example, while Oshkosh's Charles Szews spent the majority of his career in a variety of finance roles, prior to his appointment as CEO in 2011, he spent three years as COO. Similarly, Patricia Woertz began her career as an accountant, and then rose through the ranks in the finance departments at Gulf Oil and Chevron before she was rotated into broader operating roles and eventually appointed CEO of Archer-Daniels-Midland in 2006. At the other end of the spectrum, the CEO of Pfizer, Ian Read, began his career in the finance department, but transitioned into general management after a comparatively short 10 years in finance roles.
With a few notable exceptions, such as Marcel Smits at Sara Lee and Bill Delaney at Sysco, executives very rarely move directly from a finance role to the CEO position. Rather, over three quarters of these CEOs came from an operating role. Though they often began their careers in finance, the executives who have made it to the top are those who have successfully used their financial expertise to become excellent operators.
Interestingly, consulting, at four percent, ranked as the least common early career experience among CEOs. Nevertheless, some highly successful CEOs have come from that world. John Donahoe, CEO of eBay, started as an associate consultant at Bain & Co. and rose to become the firm's Worldwide Managing Director. DirecTV's CEO Michael White, after graduating from Johns Hopkins' School of Advanced International Studies, worked at Andersen Consulting and then spent five years at Bain. Both Jerry Storch, CEO of Toys 'R' Us, and Russ Fradin, CEO of SunGard, worked at McKinsey, and Indra Nooyi spent six years at The Boston Consulting Group in the beginning of her career (she was eventually appointed CEO from the CFO position).
Settle In - Eventually - and Climb the Ladder
More than three-fourths of today's top leaders were appointed internally. When evaluating CEO candidates, companies tend to favor internal appointments, as opposed to external appointments, because internal candidates understand the company culture, are familiar with the key stakeholders, and are known to the board members and other members of the executive team. Given that internal executives know and are well-known to the company, promoting the internal executive often poses less of a risk than hiring someone from the outside.
However, while more than three-fourths of today's top leaders were appointed internally, less than a third of CEOs were "lifers" (people who spent nearly their entire careers at the company they now lead). The average time to CEO appointment for those who rose through the ranks at
their company is 16 years, but the average age at time of appointment is 50. Therefore, when executives reach their early thirties, they begin to settle in at one particular company to rise through the ranks. While companies value executives who understand the company culture, they also recognize the importance of executives who have spent time at multiple companies. Experience at several companies provides CEOs with an outside perspective and enables them to draw best-in-class practices from a broad range of companies.
Time to CEO Appointment
While the average time to CEO appointment is 16 years, it differs from industry to industry. Not surprisingly, technology appears to offer the fastest path to the CEO chair, while industrial companies appear to offer the slowest. Technology companies make up about 10 percent of the Fortune 500, but comprise 15 percent of the CEOs appointed before age 50. Industrial companies, making up about 37 percent of the Fortune 500, have only 30 percent of the under-50 appointments. Similarly, average time to CEO appointment for internal appointments at technology companies is close to 14 years, whereas average time to CEO appointment for internal appointments at industrial companies is closer to 18 years. Also of note is the fact that technology companies appoint almost 20 percent more external CEOs than industrial companies.
About 45 percent of CEOs served as non-executive directors on public company boards before being named chief executive of the Fortune 500 companies they lead today. Executives typically look to join boards before becoming CEO because they view board experience as a form of professional development. Serving on a board provides them with the opportunity to learn from other high-caliber executives, see the CEO role through the board's lens, and gain corporate governance experience. While serving on a board can often help with an executive's professional development, there is also an opportunity cost associated with joining a board given the time commitment required. Executives who would like to become CEOs should be mindful of this and should join a high quality board where they can develop their experience, exposure to corporate governance, and visibility.
While this portrait of a CEO could shift in the coming years, most of the attributes reflected in our findings are likely to become only more pronounced with the passage of time: financial acumen will continue to be important in an increasingly globalized and economically interdependent world, companies will place a high value on organizational and cultural knowledge, and an increasing number of executives will look to board service as a way of gaining a broader perspective prior to becoming CEO.