Ideas for Leaders #260

Outsider CEOs and Strategic Change

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Key Concept

While companies in crisis bring in outsider CEOs to effect change, many of them fail. New research shows why: Outsider CEOs need corporate stability to successfully bring change to an organization.

Idea Summary

While the commonly accepted wisdom is that new CEOs from the outside will be in a better position to bring change to an organization, the record indicates otherwise. They often fail.

Ayse Karaevli of the WHU-Otto Beisheim School of Management, and Edward Zajac of Northwestern University’s Kellogg School of Management challenge the conventional wisdom and argue that corporate stability enables outsiders to make the necessary changes. Karevli and Zajac identify corporate stability as:

  • Ordinary succession: the previous CEO was not fired or left under a cloud;
  • A long-tenured predecessor: the previous CEO retired or moved to a new position after a number of successful years at the helm of the company;
  • The company revenues and profits are satisfactory and steady (or growing).

The research of Karaevli and Zajac is based on extensive data from the airline and chemical industries in the U.S. (110 companies in all) covering the period 1972 to 2010. The results show that the three factors did impact the ability of the new outsider CEO to implement change. There were some slight differences among the factors. After an ordinary succession, the change is related more to standard practices and norms in the industry. In companies that had a long-tenured predecessor, the change is related more to the company’s past experience, that is changing past strategies or culture. Firm performance proved to be an important factor: significant change was seen both in terms of past strategies and industry norms.

In sum, the research confirmed that firm stability enables outsider CEOs to effectuate change, which firm instability is a barrier to change. 

Business Application

There are a number of reasons why a new outsider CEO is more likely to succeed in a stable corporate environment. For example, when a CEO is fired, or when previous CEOs stayed for just a short time, a board is going to be under pressure to replace the CEO quickly. This hastiness can lead to poor choices, including choosing high-profile CEOs whose star quality may appease nervous shareholders and employees, but who may not be the best fit for the company.

In unstable environments as well, a board may be wary of risk and thus reluctant to give the new CEO free rein. Even the most talented CEO will have difficulty implementing change when tightly controlled by a skittish board.

If the firm if performing well, however, or if the company is emerging from the rein of a successful, long-tenured CEO, a board of directors will be less inclined to over-monitor or over-direct a new outsider CEO. In addition, a long-tenured predecessor may in fact have set the stage for change. Given the natural tendency for individuals to stay in the comfort zone in which they’ve been successful, a long-tenured predecessor may have resisted urged by others in the long-term interests of the organization.

The lessons are clear, both for successful companies and companies in trouble:

  • In times of trouble, don’t be in a hurry. Despite the pressure to reassure shareholders, employees and partners as quickly as possible, boards must take the time to find the right person.
  • Give the CEO the space to succeed. Boards that hire an outsider CEO must deliberately adopt the mindset that it will give the new CEO some discretion and allow the new CEO to take some risks. This will be easier when the company is doing well, but is especially important when the company is in trouble.
  • Success should lead to change. Perhaps the most counterintuitive lesson of the research is that successful and stable companies are in the best position to take advantage of the change opportunities created by an outsider CEO. In addition to a successful organization being more open to change, the success itself might have hindered change needed for future success.

Whether managing a troubled company or a successful one, the research of Karaevli and Zajac should be studied before any decisions on bringing in an outside CEO, or even promoting an inside successor, is taken.

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Authors

Institutions

Source

Idea conceived

  • November 2013

Idea posted

  • November 2013

DOI number

10.13007/260

Subject

Real Time Analytics