Outsider CEOs: not just for bad times anymore

Photo courtesy of Derrick Coetzee on Flickr

Photo courtesy of Derrick Coetzee on Flickr

Rob Swystun, Pristine Advisers

When is the best time to bring in an outsider CEO rather than the one you’ve been grooming since it hatched from its little CEO egg (or wherever they come from)?

If you are conventionally wise, you’d say the best time to introduce an outsider CEO is when a company is faltering. Outsider CEOs bring fresh perspectives to the company and shake things up without the baggage of knowing the company inside out, which is why they are favored for those turbulent times.

However, as reported by Matt Palmquist writing for Strategy+Business, a new study says that it may be best to follow unconventional wisdom here if you want the best out of an outsider CEO and bring them in when times are stable and everything is going smoothly.

Oh, an outsider CEO will still shake things up and most likely enact a bunch of change if you bring them in during a calm period, but that change will be much more effective than if they’re brought in during turbulent times.

The study, by Ayse Karaevli of WHU—Otto Beisheim School of Management, and Edward Zajac of Northwestern University and published in the Journal of Management Studies, found that when outsider CEOs are brought in, they generated the most effective change in the quickest manner if they came in after a planned succession and took over from a long-tenured predecessor when the company was in good financial health, meaning outsider CEOs shake things up most effectively not in the face of chaos, but when taking the controls of the proverbial well-oiled machine.

In these cases, outsider CEOs have abundant time to survey the lay of the land, and are able to see the marketplace and the company’s place in it clearer, the authors suggest.

“Since many large corporations with bureaucratic structures and established cultures are having difficulties in staying nimble and flexible in strategy execution, our study points out the benefits of more proactive outsider CEO hiring from the board of directors independent from firm performance and after ordinary retirements of prior CEOs,” the authors write.

On the other hand, if the company has been struggling for the last year and the outgoing CEO has been sacked, situations like these often call for drastic change and it’s thought that outsider CEOs can provide just that. However, these new outsider CEOs are often looked at as some kind of potential savior and in wanting to be that savior, they can be quick to make unsound decisions and can often end up sinking with the company rather than acting as its savior.

How they did it

Karavli and Beisheim combined a bunch of databases and analyzed mid-sized and large publicly traded companies in both the airline and chemical industries that were in operation in the United States between 1972 and 2010. Both of these industries experienced significant ups and downs during the this time period.

They then analyzed the first three years of a new CEO’s tenure, measuring the following six indicators:

  • changes to a firm’s advertising intensity,
  • research and development activity,
  • plant and equipment upgrades,
  • non-production overhead,
  • inventory levels, and
  • financial leverage or debt.

New CEOs were also ranked on an “outsiderness” scale. So, for example, a CEO who had no experience in the industry would be more of an outsider than a CEO who had no experience with the company, but who did have experience within the industry.

The authors defined corporate stability during a CEO changeover as the absence of social, political and financial turbulence. They looked at the reason the previous CEO departed, how long the outgoing CEO had been in charge and the recent financial performance of the company.

The study authors put controls in place for the sizes and ages of the companies and found that, not unexpectedly, firms looked outside the company and industry for a new leader during periods of volatility within their industry or company. Conversely, when companies were enjoying relative prosperity and calm times and the CEO switchover was expected (like a retirement vs. a sacking), companies looked inside their own ranks and often replaced the outgoing CEO with an heir that had been specifically groomed.

This puts an entirely different spin on the concept of when to bring in a CEO from outside of a company’s “comfort zone.” Apparently, to take full advantage of it, boards should think outside the company when things are at their rosiest during a planned CEO departure.

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5 responses to “Outsider CEOs: not just for bad times anymore

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