The new CEO

 A company in the hospitality business hired a new CEO, who came from a different industry. As it goes, the CEO went through a short period of induction before he came on stage to address a group of employees. He was kind of nervous about what he could say to these people who worked in an industry he did not know. He thought he had to be inspirational. So what he did marked the end of his reign. He took a powerpoint deck on leadership and governance from his previous company, changed the layout and presented it to the audience.

 

They gazed at him. They did not understand where this presentation was coming from. It was full of language that was strange to them. This CEO was unable to absorb the new culture and adopt a language that inspired trust.

 

He did not last long. 

 

Creatures of Habit

Let’s not underestimate the impact of previous expezriences on the behaviour of new CEO’s. Someone coming from GE might automatically assume that the GE way is appropriate to any other business. aNd so they will push for black belts. Someone coming from Toyota might want to introduce the Toyota Way. And someone coming from Spotify would probably want to copy its agile culture.

People are people, creatures of habit.

Outside or Inside?

The examples cited above might suggest that hiring a CEO from outside is not a good thing. No CEO can stay on for ever. Every CEO has an expiration date. And then there’s the decision on a new CEO with the eternal question: Should that CEO come from outside or from the inside?

This meta-analysis on CEO succession reveals that a new CEO has no impact on short-term performance. If the new CEO comes from within the organization, the impact on long-term performance is positive. And strangely enough when the CEO comes from outside, there seems to be a negative impact on long-term firm performance.

 

Why would that be?

 

CEOs coming from the outside usually undertake many strategic change projects. And strategic change leads to disruptions that have a negative impact on firm performance. High investments, uncertainty, …

 

But in times of crisis, continuity might be a bad thing. This could suggest that if an organization is in crisis it would be better anyway to hire an external CEO as he or she will be able to take more drastic decisions and go for needed strategic change. But measures must be undertaken to mitigate the collateral damage. Barging in is not the right approach. And the myth of the first 90 days should really be challenged.

The authors of the meta-analysis suggest to provide for sufficient guidance.

 

If a company is in need of strategic change, you’d better hire an outside CEO. But the risk is that the overall company performance is negatively impacted. The CEO lacks inside information and may take rapid decisions based on experiences from previous assignments.

What should governance do?

The non-executive board of directors that decides on the nomination of the new CEO should be aware of the risks and consequences of CEO succession and take into account the contextual factors.

CEO Succession

Boards should be aware of their decision biases as well. When the board is larger and has more independent members, it will decide more in favour of an outside CEO tcoming from a different industry, whereas a smaller board consisting of people from within the industry will go for a successor who comes from within (Jalal e.a. 2012).

 

The choice for a CEO should be determined by the context.

 

So if there is no need for strategic change, the choice should always be an internal successor. That requires preparation and planning. And the governance style should be one of coaching. If the board hires an outside CEO anyway, the right approach is to challenge them mainly on cultural matters.

 

If there’s a need for strategic change, the choice for an external CEO is probably better. But ath that moment, governance should challenge the new CEO in order to avoid strategic exaggeration and excessive collateral damage. Evidence suggests also that when hiring an outside CEO, they’d better come from a different industry (check Jalal e.a. 2012).

 

Whatever the reason for the exit of a CEO may be, the succession is a pivotal moment. Boards can adapt their guidance according to the profile and origin of the successor. A risk assessment to identify possible derailing factors is advisable, with extensive executive coaching to limit collateral damage.

Never assume a new CEO will do the right thing.

Resources

  • Abu M. Jalal, Alexandros P. Preza (2012). Outsider CEO succession and firm performance. Journal of Economics and Business. 64, 399–426
  • J. Schepker, Youngsang Kim, Pankaj C. Patel, Sherry M.B. Thatcher, Michael C. Campion (2017). CEO succession, strategic change, and post-successionperformance: A meta-analysis.
  • The Leadership Quarterly, 28 (6), 701-720

Never assume

Hiring a new CEO is a critical moment for a company. Don’t assume it will go well and try to detect the risks. Otolith can help your organization through a personal risk assessment and executive coaching. 

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