The Pilot Faints, from Coleridge's Rime of the Ancient Mariner, illustrated by Gustave Doré, published 1798
Ideas for Leaders #270

Choosing a CEO: Safe Pair of Hands Vs Too Much Experience

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Key Concept

A good track record of experience as a CEO does not necessarily lead to success in subsequent appointments. Evidence suggests that those appointed to the CEO role without a background in the role outperform their more seasoned counterparts. Why is this so, and what can prior CEOs do to avoid ‘the experience trap’? 

Idea Summary

When companies choose their CEO, many opt for those with a proven record of success in their particular industry…nothing surprising there. This is a changing world, with increased burdens on business, the emergence of new markets, constantly-evolving technologies, and a general air of uncertainty about the future. A safe pair of hands at the helm seems like a good idea, and an ex CEO is often more favoured by the stock markets.

But this assumption that a positive track record and an understanding of the role will lead to success is being challenged by recent research. Using investment parlance, when it comes to CEOs, ‘past performance is not an indicator of future success’.

Taking an industry-wide sample from the 2005 S&P 500 corporations, the research analysed 501 CEOs, tracking their performance up to three years after taking on the CEO role. Almost a fifth (19.6%) of the sample had earlier experience as a CEO in a different organization, but the post-succession financial performance of the companies they now led was poorer than those CEOs without prior experience. In other words, outsider CEOs with experience under-performed when compared to outsiders without experience or to those who moved up the ranks internally to the position of CEO. You might assume that they were taking on companies in financial trouble, but it was no more so than for the rest of the sample. So what is the reason for this negative impact of experience?

One explanation could lie in the way a CEO has learnt to do what they do. In a new role, a CEO may use the techniques applied in an earlier position without realizing that every situation is different, every organization is different. The research refers to a ‘negative transfer of learning’ and the formation of ‘knowledge corridors and decision-making templates’ whereby past experience hinders performance in the current job and that CEOs need to ‘unlearn’ some of their skills and knowledge to get on in the changed work environment. Just because a course of action worked well before, it may not work in a new setting, even if that setting looks similar at first glance.

Taking a football industry analogy, Sir Alex Ferguson achieved phenomenal success with Manchester United over two decades but would not necessarily have produced the same results on moving to another major club. A set of skills which were well-suited to Manchester United may not have adapted to the prevailing culture in a different club.

The study examined those CEOs who moved on to other CEO positions immediately and those who did something else in between, and then moved on to a CEO role. Surprisingly, the latter group performed as well as those CEOs without experience, suggesting that a break from the CEO position helped them develop new techniques or a fresh approach that subsequently improved their performance.

Familiarity had a negative effect too, with prior CEO experience in a similar-sized organization or the same industry leading to lower post-succession performance in the current roles. Conversely, those CEOs who moved to new roles in smaller/larger organizations or tried their hand in a different sector performed as well as those CEOs without experience.

Business Application

Those responsible for hiring (the board, board selection committees, executive search firms) need to consider whether an ex-CEO is the right fit and if so, they need to give them time to understand a new culture, perhaps offering them another executive position initially before moving on to the CEO role. Implementing a longer handover period between the outgoing and incoming CEOs will also allow for smoother integration. Familiarisation with staff, products, the corporate culture, processes and structures – it takes time to absorb.

Don’t just opt for ‘the usual suspects’. The CEO’s current job may match the position you have on offer, but the obvious candidates may not always be the best. Give more attention to internal succession – you may have a promising lower-level executive who could be just as successful, if not more so.

From the leader’s perspective, the report’s co-author Monika Hamori suggests: “If you are moving to a similar job (CEO) at a different organization do not underestimate the challenges that may come from this career move. Moving into the same type of job may be just as challenging as moving to a new, different position. It seems that firm-specific knowledge, skills and social networks are one of the most important drivers of success in many executive jobs, so if leaders move to new organizations, they should get firm-specific experience before their move, in the form of board membership on the target firm’s board, for example.”

A great leader has to be able to listen as well as produce results. Try and free up your mindset when you take on a new CEO position, and immerse yourself in the new culture before you harp back to the way you acted before. The ability to listen is often ignored, yet that is what you need to do to develop your leadership style within the new setting and build a culture of success.

Experience matters but it’s how you use it in a different environment that is key.

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Authors

Institutions

Source

Idea conceived

  • May 2013

Idea posted

  • November 2013

DOI number

10.13007/270

Subject

References

Experience Matters? The Impact of Prior CEO Experience on Firm Performance. Monika Hamori & Burak Koyuncu. Human Resource Management (April 2013).

For more information about this report, please contact info@iedp.com.
 

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