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


Research Perspectives on the New CEO

The authors of this paper cite Booz & Company’s 2009 study of chief executive trends, “CEO Succession 2000–2009: A Decade of Convergence and Compression” (by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, s+b, Summer 2010), which indicated that more than half of incoming chief executives were assuming office as their predecessor stepped up to the role of chairman. The percentage of companies with this dynamic was increasing worldwide, and it was particularly evident in North America.

Because lingering ex-CEOs can reasonably be expected to support policies they enacted themselves and have power over their replacements, previous researchers have referred to them as “shadow emperors.” It has been argued that they can blunt many of the desired effects of succession, such as breaking through inertia or increasing efficiency. But until now there has been a lack of quantitative evidence to show that these negative effects are actually occurring.

Quigley and Hambrick drew on the ExecuComp database to identify all 181 CEO successions between 1994 and 2006 in three industries: computer hardware, computer software, and electronics. These sectors were chosen because they are fast-moving industries with plenty of turnover at the top and a variety of leadership structures. Only companies that had been public for at least three years and that had annual revenues of more than $100 million at the time of succession were considered, in an attempt to eliminate the influence of younger companies that might face distinctive challenges. Interim and short-term CEO appointments were also excluded from this study.

The researchers measured firms’ post-succession performance for up to five years or until the new CEO departed, comparing return on assets (ROA), shareholder dividends, and stock returns. Extensive controls were employed, including company size and resources, pre-succession performance, and typical indicators of a board’s desire for change (such as hiring an outsider, forcing a turnover, or promoting an heir apparent).

The analysis showed that shadow emperors do indeed constrain their successors. The presence of a predecessor CEO significantly suppressed several types of strategic initiative: namely, resource reallocation, divestures, and the replacement of executives. Even more striking, as long as the predecessor stayed on as chairman, company performance tended to be about the same as before succession.

“In allowing predecessors to stay on as chairs—perhaps as an honorific courtesy or because of institutionalized custom—boards need to be vigilant of the possibility that their new CEOs may be explicitly or implicitly thwarted in their attempts to update their firms’ profiles,” the authors write. In a supplementary analysis, they discovered an abrupt increase in resource reallocation, divestitures, and executive replacement once the predecessor relinquished the chairman’s position. Performance, as measured by ROA, also then tended to diverge significantly from pre-succession levels, suggesting a predecessor’s influence does not linger long after he or she actually departs. In this way, a predecessor’s retention as chairman can be termed a “quasi-succession,” say the authors, delaying many of the typical after-effects of CEO turnover.

When a board is relatively confident in an incoming CEO’s ability to exert influence, it should probably part ways with the predecessor completely, the researchers conclude. But a departing CEO with valuable wisdom and experience should perhaps be retained in a consulting role for six months or so, enough time for the successor to settle in and feel comfortable charting a new strategic direction.

Unconventional Thinking

Can we draw conclusions from these three papers, and from others like them, about the best CEO candidates for a successful company? The value of generalist skills, as described in the first two papers, seems clear. But perhaps the critical factor is not what it might appear to be. Rather than breadth of experience, boards and recruiters should look for a proven track record of challenging conventional wisdom and experimenting with unconventional ideas—especially those that pay off.

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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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