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strategy and business
 / Summer 2013 / Issue 71(originally published by Booz & Company)


Research Perspectives on the New CEO

Academic studies of the recruitment of chief executives suggest that those from outside the industry do relatively well, companies pay more for generalists than for specialists, and “shadow emperors” hamper performance.

Management researchers are taking note lately of factors affecting recruitment, selection, and performance of new CEOs. Since mid-2012, a number of academic papers have explored the impact and performance of different types of incoming chief executives. Three particularly intriguing reports shed light on some broad and significant questions:

  • When recruited from outside companies as new CEOs, are industry specialists or broad-based generalists more likely to be successful?
  • Which new CEOs—specialists or generalists—tend to command higher salaries?
  • What role, if any, should the old CEO play when a new CEO takes over?

Of course, there are no universal answers to any of these questions. Each successful company has its own unique circumstances. But the findings in these studies might prove particularly useful to those who make decisions about chief executives or have a stake in the outcome, such as boards, shareholders, sitting CEOs, and executives with aspirations for the top office.

A Premium for Cross-Industry Experience

Most firms consider outside candidates for CEO even if there are strong internal contenders. But how far outside? Should someone be brought in from another industry? A new CEO with industry-specific knowledge would presumably have better-informed judgment, but someone from another sector could offer fresh ideas.

Outsider CEO Succession and Firm Performance,” by Abu M. Jalal and Alexandros P. Prezas of Suffolk University in Boston, examines the impact of appointing external candidates on a firm’s operating model and stock performance, and also on CEO compensation. The results suggest that many companies that look outside would do better in the long term by hiring someone from far outside—from another industry.

This finding, to be sure, applies to only about one-third of the large companies seeking CEOs. That is the percentage that, for planned transitions in 2012 at the 2,500 largest public companies in the world, chose an outsider as a new chief executive (see “Portrait of the Incoming Class,” by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, s+b, Summer 2013). Even so, the number of CEO vacancies filled by outsiders, including those from other industries, has been increasing in recent decades.

No previous research had reached a conclusion about whether general managerial skills or specialized industry expertise has more value when leading a major company, especially when coming in from the outside. Jalal and Prezas  aimed to fill the gap by examining the stock market’s reaction to the arrival of the two types of outsiders. They also looked at other results: the company’s stock performance, short-term profitability, and long-term growth potential during the five years that followed each new CEO’s arrival. Combining data from Compustat and the Center for Research in Security Prices, the authors analyzed outside CEO successions at 528 companies from 1993 through 2009; of these turnovers, 216 hires came from the company’s industry and 312 were from other sectors. (The study did not include CEOs hired from inside the same company.)

On average, firms bringing in someone from within the same industry had higher overall returns than those with non-industry outsiders, at least during the first few months. But the picture soon began to change. By the third or fourth year following succession, firms that had reached beyond their own industry to appoint a CEO posted better stock returns, on average, than those hiring closer to home.

“It appears as if initially the market is not as favorable about the prospects of firms hiring CEO successors from another industry, but once these firms introduce policy changes and demonstrate better performance under their new CEOs, the market turns and remains in their favor,” the authors write.

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  1. Cláudia Custódio, Miguel A. Ferreira, and Pedro Matos, “Generalists versus Specialists: Lifetime Work Experience and CEO Pay,” Darden School of Business Working Paper No. 2116525, July 2012. The paper will also appear in a forthcoming issue of the Journal of Financial Economics.
  2. Abu M. Jalal and Alexandros P. Prezas, “Outsider CEO Succession and Firm Performance” (subscription or fee required), Journal of Economics and Business, vol. 64, no. 6, Nov.–Dec. 2012.
  3. Timothy J. Quigley and Donald C. Hambrick, “When the Former CEO Stays on as Board Chair: Effects on Successor Discretion, Strategic Change, and Performance” (subscription or fee required), Strategic Management Journal, vol. 33, no. 7, July 2012.
  4. For more thought leadership on this topic, see the s+b website at:
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