Companies increasingly seek to hire CEOs with previous experience in the role. However, new research suggests that is not always a wise choice.
“A lot of chief executives look very successful and are very successful in a company at a point in time. They look like geniuses. But the real test is if you take that genius and put him in a totally different situation to succeed again. And to do that, they have to be able to listen, able to understand, able to hear why the culture is totally different … the behavior that worked where you worked before ain’t gonna work here.”
A growing number of companies recruit CEOs with a proven track record. According to a Booz & Co. study of CEO succession at the world’s biggest public companies, almost 20% of both incoming and departing CEOs at such companies in 2008 had had CEO experience at another corporation, almost twice the average percentage for the 11 years studied. Companies resort to hiring prior CEOs because they are increasingly unwilling to take the risk of hiring executives with no previous job-specific experience. They also assume that CEO job experience provides both a good track record and an understanding of the role.
But is this assumption correct? To answer that question, we collected data on the career histories of the CEOs of S&P 500 corporations who occupied the CEO post as of 2005 and tracked their performances up to three years after their appointments to the CEO position. Industries included agriculture, mining, construction, manufacturing, transportation and utilities, financial services, retail and wholesale, and other services.
Out of the 501 CEOs we looked at, 19.6% had at least one prior CEO job. Our research found that these prior CEOs performed worse than their peers without such experience. Being a prior CEO was negatively and significantly associated with three-year average post-succession return on assets.
Why Does This Happen?
One possibility is that experienced CEOs underperform their peers without job-specific experience because they face more hurdles in their new job: They have to lead organizations that have greater financial problems than those of their peers.