Pepin being crowned King of the Franks by St. Boniface in 751, engraving by Robert Gaguin, Paris, 1514
Ideas for Leaders #570

Why Previous Experience of New CEOs Makes Matters Worse!

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Key Concept

Newly hired CEOs who have held previous CEOs positions are more likely to fail than new CEOs who have never held the top position in a company, according to new research. The reason: they did what they did in the past, without paying attention to the new context.

Idea Summary

Should a board hire a former or current CEO from another company to become the new CEO? In the past, companies tended to promote new CEOs from within, ensuring that the new chief executive had the vital firm-specific experience needed to succeed. Today, however, more boards tend to believe that someone who has successfully navigated the pressures and expectations of the top position would be more qualified to take over the top spot in their company.

New research, however, questions the validity of the new approach. Monika Hamori of IE Business School and Burak Koyuncu of NEOMA Business School analysed the data on the 501 CEOs who headed the 2005 Standard & Poor’s 500 companies (one company had two co-CEOs). Specifically, they reviewed the biography of each CEO (whether or not they had previous CEO experience prior to their succession at the head of their current company), and the operational results of the company in the three years after their succession (based on Return on Assets or ROA and Return on Sales or ROS).

The researchers included in their analysis several variables, such as whether the CEO moved directly or indirectly from another CEO position. An indirect move would mean that the CEOs in question held some other position between their last CEO position and their current position. They also examined whether the prior CEO experience was in the same industry as the current company.

The results of their analysis showed unequivocally that newly hired CEOs who had prior experience as a CEO had worse results in the three years following their accession than newly hired CEOs with no previous CEO experience. The researchers controlled for outsider status or pre-succession company results (how poorly the company was performing before the hire); neither factor explains the poor results.

The data also showed that CEOs with prior experience had considerably lower results than CEOs with no experience if they came:

  • directly from another CEO position,
  • from a firm of a similar size, or
  • from the same industry.

However, if these factors were not in play (i.e. the CEOs came to the position indirectly, or from different-sized or different industry firms), the newly hired CEOs with prior experience performed at the same level as CEOs with no previous CEO experience.

These results emphasize that the more the surface characteristics (e.g. same size, same industry) of the new position aligned with the previous CEO position held by the newly hired CEO, the more likely the new hire would fail.  

Business Application

Based on this analysis, and supported by additional interviews with headhunters and hiring managers, Hamori and Koyuncu conclude that new CEOs fail because they believe that what worked for them in the past will work for them in their new position. CEOs who have been successful in the past develop ‘knowledge corridors’ and ‘decision templates’ that they use moving forward. Instead of adapting their thinking and decision making processes to a new context — e.g. new staff and employees, new culture, new financial situation — they simply do what they’ve always done.

To be successful, a newly hired CEO with previous CEO experience must consciously make an effort to unlearn the knowledge and skills they used in their previous position that are inappropriate or ineffective in the new context. This unlearning requirement can be a counterintuitive barrier to the newly hired CEO.

Boards, board selection committees and hiring organisations must recognize that a CEO who was successful in a certain context at a certain time may not be successful in a new context.

As a result, they must take extra care when onboarding a CEO with previous experience to ensure that the newly hired CEO fully understands and appreciates the specific context of the company. One option is to offer the candidate an interim position to allow him or her to acclimate to the new context.

Perhaps the most important lesson of this research, however, is that boards or board selection committees should not pursue the most obvious candidates, such as the mediagenic CEO celebrated for his or her success at a high-profile company. Instead, they might help their companies more by taking a risk on promising lower-level executives; in the long run, these candidates might prove to be less of a risk. 

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Authors

Institutions

Source

Idea conceived

  • February 2015

Idea posted

  • November 2015

DOI number

10.13007/570

Subject

Real Time Analytics