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For CEOs Past Performance Is No Guarantee Of Future Success
Featured in Forbes
Just as they do when hiring junior employees, companies looking for new chief executives tend to prefer experience. But is this always helpful? A study by academics from two European business schools suggests not. In fact, their research indicates that CEOs who had previously held the same position in another organization performed worse that those who were new to the role.
For their paper, “Experience matters? The Impact of Prior CEO Experience on Firm Performance”, about to be published in Human Resource Management journal, Monika Hamori of the IE Business School in Spain and Burack Koyuncu of the NEOMA Business School in France collected data on the careers of CEOs of S&P 500 corporations in position in 2005. They found that 19.6% of the CEOs had had at least one CEO job prior to their current one and that these executives performed worse than those without such experience.
Koyuncu said: “Our research suggests that the job-specific experience these CEOs gained in their prior CEO job interferes with their performance in their new job. Their job-specific experience may slow down learning because some knowledge and techniques need to be ‘unlearned’ before learning in the new context can take place.”
The authors also suggest that experienced CEOs may apply lessons learned in one situation to another in the mistaken belief that they are facing a similar situation to one they have seen before. That is, they may take decision-making shortcuts that lead to them arriving at the same answer to a different problem. “Prior CEOs may be too embedded in the norms, culture and routines of one organization and thus may underperform in another because they have developed fixed assumptions about how tasks should be done,” added Koyuncu.
A way around this issue might be for companies to hire from within (as many highly successful companies do) or even to hire outsiders without prior CEO experience. But, writing about the research in the Fall 2013 issue of MIT Sloan Management Review, Hamori and Koyuncu suggest that organizations resist this because they are increasingly unwilling to take the risk of hiring executives with no previous job-specific experience. They cite a study by the consultancy Booz & Co that found that nearly a fifth of both incoming and departing CEOS at the world’s biggest public companies in 2008 had had CEO experience at another corporation – almost twice the average percentage for the 11 years studied.
The advice offered by Hamori and Koyuncu to organizations that insist on picking candidates with a track record is to put CEOs with prior experience in an interim position for at least a year before they take on the full CEO role. This, they say, would enable them to acquire company-specific knowledge and also to “unlearn” some of the assumptions about the job.
But this may not always be practical, so they also suggest involving a future CEO in the company’s operations before they take the job. While this might not help with unlearning assumptions, it should help them become more familiar with how their new company does business. “In fact, many ex-CEOs who have success in their new CEO jobs served as a member of the board of the company before being appointed to the new CEO position,” they write.
As an example of this they point to John Rishton, who was CEO of the Dutch retailer Royal Ahold for three years before becoming chief executive of the British aerospace company Rolls-Royce in 2011. Rishton had been a non-executive director of the company since 2007 and had won the trust of fellow board members in the period leading up to his appointment. The carefully-planned and executed succession process took a year, but was rewarded with profits increasing by more than a fifth in 2011.
In general, write Hamori and Koyuncu, companies hiring CEOs with prior experience of the job need to provide plenty of assistance with their transition and integration, with collaboration with the outgoing chief executive if he or she remains as chairman. “The greater the opportunity for acculturation, the greater the chance the company can avoid falling into the CEO experience trap.”