The CEO experience trap

2013

As the shortlist of external candidates being considered to replace Steve Ballmer as Microsoft CEO narrows to just five people, including Ford Ford Motor Co chief Alan Mulally and former Nokia CEO Stephen Elop, Microsoft's board might want to re-examine their preconceptions about the desirability of appointing someone who is currently a CEO or has recently been at the helm of a corporation.

Because according to a new study by Burak Koyuncu of NEOMA Business School in France and Monika Hamori of IE Business School in Spain, prior experience in the CEO post doesn't bring any positive benefits when it comes to a new role. In fact, prior CEOs perform worse than their peers without such experience.

In their paper "Experience matters? The Impact of Prior CEO Experience on Firm Performance" – to be published in Human Resource Management journal - Koyuncu and Hamori collected data on the career histories of the CEOs of S&P 500 corporations who occupied the CEO post from 2005.

Tracking their performances for up to three years after their appointment, the researchers found that almost one in five (19.6 per cent) had held at least one prior CEO job and that those who transitioned directly from a prior to a new CEO job showed a significant 48 per cent lower three-year average post-succession returns on assets.

In contrast, CEOs who spent time working in a different position between CEO jobs showed no significant difference in performance than CEOs without prior experience.

"Our research suggests that the job-specific experience these CEOs gained in their prior CEO job interferes with their performance in their new job," said Koyuncu. "Their job-specific experience may slow down learning because some knowledge and techniques need to be "unlearned" before learning in the new context can take place."

The behavioral factor at play here is that prior CEOs may rely on experience from past events, so are more likely to follow decision-making shortcuts which may cause them to give the same answer to a different problem.

"Prior CEOs may be too embedded in the norms, culture and routines of one organization and thus may underperform in another because they have developed fixed assumptions about how tasks should be done," Koyuncu added.

As Monika Hamori pointed out in a 2010 interview, boards looking for a new CEO tend to only look at the population of CEOs, so ignoring lower-ranking executives, very promising COOs, or presidents who would be great CEO candidates.

"I think that's a mistake. They should also look at lower ranking executives. In addition, my research shows that boards too often go outside their organizations in the search for talent and that strategy for doesn't tend to pay off either. Internal candidates who have had a longer tenure with the organization actually fare better after becoming CEO," she said.

In order to avoid the CEO "experience trap", the authors recommend that hiring companies put CEOs with prior experience in an interim position for at least a year before they take on the full CEO role.

"In general, companies that hire CEOs with prior CEO experience need to provide ample support to their transition and integration – the greater the opportunity for acculturation, the greater the chance the company can avoid falling into the CEO experience trap," said Koyuncu.

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