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CEOs' experience doesn't explain performance in new company

Christian Fernsby |
Appointments of outside CEOs pose a paradox.

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A third of all CEOs are hired from outside, often with the idea of transforming the company. Yet, on average, these outsiders underperform relative to inside CEOs that have been promoted from within and company.

A study with Thomas Keil (University of Zurich) and Stevo Pavićević (Frankfurt School of Finance and Management) sought to uncover when and why outside CEOs underperform.

Analysis of 1,275 CEO appointments in publicly listed U.S. companies, contrary to received wisdom, neither the length of the new CEOs' experience in executive positions nor the breadth of their experience across different companies explain the performance differences.

Rather, analysis suggests that it is the fit of the corporate backgrounds of the hired CEOs and the organizational characteristics of the hiring companies, such as their industry focus, size and life cycle stage, that drives performance.

Post succession company performance declines with a misfit between the CEO's corporate background and the company's organizational characteristics.

Misfit makes it challenging for the CEO to grasp organizational problems, and so the CEO tends to pursue unsuitable courses of action that may have worked well in previous posts, but are ineffective in the new position.

Most importantly, the main explanation for the underperformance of outside CEOs has little to do with their qualifications or background.

Instead, it can be ascribed to negative sentiment that is rooted in a socio cognitive bias of the company's stakeholders, such as board members, employees, business partners, analysts, and the media.

Content analysis of press items as well as the analysis of employees' ratings, analysts' recommendations around the time of CEO appointment suggests that these stakeholders scrutinize the CEO, may withdraw their support and actively resist the CEO's decisions, which can damage the company's reputation and undermine its performance.

Whereas inside CEOs can leverage their organizational familiarity and social embeddedness in the company to fend off or at least manage the consequences of this negative sentiment, outside CEOs face greater challenges.

While outside appointments pose unique challenges, appointing outside CEOs can pay off when their background fits the company's characteristics, and the hiring board takes actions to manage potential negative sentiment by stakeholders. This requires adaptation of established onboarding practices.

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