What the Smart Money Says About Black CEOs

When any public company announces a new CEO, the board braces itself for investors’ reactions as they manifest in decreases or increases in share price. Investors are a highly salient stakeholder group whose responses to the appointment of chief executives, especially racial minorities, are highly anticipated and undoubtedly influence who is selected. But how much should their prospective reactions matter when a board is leaning toward selecting a Black candidate for the CEO role?

The issue is urgent. Despite noteworthy progress toward racial equity in some industries and at some job levels, Black representation in corporate America’s top leadership positions remains woefully low: The number of Black Fortune 500 CEOs peaked in 2023 — at nine. That is less than 1 in 50 for a racioethnic group that accounts for more than 1 in 8 Americans.

Recent research findings have highlighted how investors’ biases and perceptions influence their reactions to the appointment of Black CEOs. However, different groups of scholars have offered two highly divergent perspectives. One is pessimistic, suggesting that racial discrimination in American society pervades investors, thereby precipitating a negative stock market reaction to Black CEO appointments. The other, more optimistic view reflects positive market reactions when investors recognize the extensive and valuable human and social capital accrued by Black CEOs — individuals who overcame various hurdles to become senior executives.

Our ongoing research suggests that the factors underlying both views can contribute to market reactions and racial inequity. We find that Black leader appointments affect company financial valuations differently than those of White leaders, depending on whether the appointee is a known commodity and on the number of highly skilled employees they will lead. In short, appointing a Black leader often leads to positive market responses when the leader has a positive track record and the organization possesses less human capital. However, the stock market response is often negative when the leader is relatively unknown and collective human capital — that is, the economic value of the skills, knowledge, and experience of the workforce — is higher. Finally, we find that while there is evidence of negatively biased market responses to Black CEO leaders during their tenure, there is no difference in the actual financial performance of Black CEOs and their peer CEOs — even though minority executives tend to get appointed to more precarious situations, a phenomenon known as the glass cliff.

This last finding is particularly noteworthy because evidence suggests that minorities don’t generally fail upward. Often, by the time they’ve advanced to the C-suite and are potential CEO appointees, they’ve accumulated comparable, if not better, experience and skills than their nonminority counterparts. That notwithstanding, investors still undervalue Black CEOs relative to their non-Black peers.

Nevertheless, investors as stakeholders are not homogeneous. Some are more knowledgeable than others about the inner workings of the C-suite, individual companies, and certain industries. Our studies show that this class of investors, known as institutional investors, respond more positively to Black CEO appointments than the broader equity markets, and these investors often add to their equity positions following such appointments. Institutional investors, which have greater in-depth knowledge of companies compared with participants in the broader market, are likely able to use this information to make more informed and accurate assessments of the qualifications of CEO candidates, exclusive of racial bias.

Better Ways to Evaluate CEO Candidates

Boards usually consider potential investor reactions in making important decisions because they capture the proverbial wisdom of the crowd. But evidence suggests that the crowd is not wise when decisions are susceptible to racial biases and prejudices, such as with executive appointments — leading us to suggest that in these cases, potential investor reaction should not be a factor in decision-making. In fact, other research has shown that the initial stock market reaction to a CEO’s appointment is not predictive of stock market performance during their tenure. Below, we suggest practices for establishing a more equitable hiring process — and one that is more likely to bring qualified Black candidates into the pipeline.

1. Develop objective criteria before beginning the selection process. Instead of relying on poor-quality signals such as market reaction, boards in the midst of a CEO hiring process who want to ensure that Black candidates are fairly considered should carefully evaluate the criteria needed for successful performance as CEO for their organization and ensure that a diverse applicant pool consists of qualified candidates who meet those criteria. After the board creates an initial pool of candidates for consideration, we suggest it revisit its criteria. The point is not to change criteria to justify one’s choices. (This is a common mistake that contributes to suboptimal selection.) Rather, one should consider why each person in the candidate pool has been deemed worthier than those who didn’t make the cut. Too many similarities between candidates and those excluded, as well as too many exceptions to one’s selection criteria, might reflect a biased selection process.

2. Identify and invest in high-potential Black employees. We find that knowledgeable investors react much more positively than the market in general when a company appoints a Black CEO who is also an organization insider. That’s one reason why companies looking to hire qualified Black leaders into executive positions should make every effort to identify and develop high-potential Black employees within their organization. Development means providing opportunities for high-potential Black executives to develop their skill sets in challenging roles and encouraging these employees to invest in themselves and their careers. In particular, organizations should invest in their professional development related to deepening their human and social capital. Development can also occur through mentorship by more senior executives and supporting events that allow high-potential Black employees and junior executives to develop their social networks. And, of course, make sincere efforts to retain these employees to ensure that the company reaps the benefits of a “homegrown” executive.

While your organization might make earnest efforts to support high-potential Black employees, other organizations might not do the same. These employees may be receptive to recruitment and are often capable managers. Higher-quality managers translate into an increase in organizational capability and profitability, and deeper bench strength for future company executive leadership. Such hiring practices will yield a pool of Black CEO candidates as these managers rise through the organization.

3. Enlist non-CEO Black senior executives as directors. There are numerous prospective benefits to a company appointing Black senior executives to corporate board directorships. Like other qualified candidates, Black executives are highly competent, capable strategists, and therefore retaining their services benefits the company’s executive leadership team. What is unique, however, is that their presence also provides an opportunity for the other directors, CEO, and top management team to get to know the Black executive, providing firsthand insights about their qualifications for CEO (as well as other roles) for their company or other organizations in which they have influence.

Organizations should seek CEO candidates who add value to the company by providing capable leadership. Although there is some evidence of adverse investor reaction to the appointment of Black CEOs, this should not scare off prudent organizations from increasing the appointment of Black executives. Indeed, our research shows that informed investors have reduced biases when reacting to Black CEO appointments because they value the skill sets these executives bring to bear on behalf of the company they lead. Further, their attention to qualifications rather than to what the broader market reaction may be appears to pay off, given that Black CEOs perform as well as their non-Black counterparts. Thus, there is an opportunity for organizations to increase racial equity in executive leadership in ways that are profitable to the organization and its shareholders, as well as to society at large.

Corporate boards and executive leadership must be willing to acknowledge the role of racial bias in the executive pipeline and do the work necessary to ensure that such biases do not preclude the rise of talented Black executives. Broad market reactions are important to pay attention to, but boards must be careful not to overreact to biases that perpetuate inequality. It simply costs too much.