In the high-stakes arena of strategy, CEO experience is often heralded as the ultimate asset. Boards, private-equity companies, and owners of privately owned companies clamor to recruit CEOs with prior experience.
Yet, peer-reviewed research challenges this notion. It reveals that more experience in the CEO role might actually lead to financial underperformance and then further shows why.
Study Results
The study examined 501 CEOs of publicly traded companies, with 98 having prior CEO experience. The statistical model controlled for potential confounding factors such as CEO’s education, age, type of prior experience in addition to firm factors such as industry type and size. Thus, the results are robust to potential confounds.
The performance comparison of CEOs with and without prior CEO experience revealed that CEOs with prior experience often underperform those without. Specifically, Table 1 shows a statistically significant negative impact on post-succession firm performance for CEOs who transition directly from another CEO role.
Table 1
Company Performance Based on Prior CEO Experience
Post Succession...
CEOs with Prior CEO Experience
CEOs without Prior CEO Experience
Return on Assets (ROA)
Lower
Higher
Debt Ratios
Higher
Lower
Chances of Bankruptcy
Higher
Lower
Why More Experience Hurts
The research identified several reasons why prior CEO experience can hinder performance:
- Difficulty in Unlearning: Experienced CEOs may find it challenging to unlearn old habits and adapt to new organizational cultures and practices. This “knowledge corridor” restricts their ability to respond to new challenges by acting differently.
- Decision-Making Shortcuts: Relying on past experiences, CEOs may use decision-making shortcuts that worked in previous roles but are not suitable for their current organization.
- Overconfidence: Successful past experiences can breed overconfidence, causing CEOs to underestimate new challenges and ignore dissenting opinions.
- Firm-Specific Knowledge Gap: CEOs from outside the organization may lack the firm-specific knowledge and social networks necessary for effective leadership.
- Cultural Misfit: Organizations are very different from each other. Deep-rooted understanding of one organization’s culture may not translate well to another, leading to friction and misalignment with the new firm’s values and practices.
Strategic Implications for CEO Hiring
Instead of getting fixated on hiring CEOs with prior experience, those tasked with hiring CEOs should takes steps to help inexperienced CEOs succeed. Consider these strategies:
- Interim Positions: Placing experienced CEOs in interim roles before their official appointment can help them acclimate to the new organization and unlearn old habits and outdated practices. It also enables the incoming CEO to understand the new company’s culture and operations.
- Board Membership: Encouraging experienced CEOs to serve on the board before taking on the CEO role provides insights into the company’s inner workings. This pre-appointment period can help build relationships and increase the CEOs understanding of the organization.
- Support Structures and Pilot Projects: During the transition period, support such as mentorship from outgoing CEOs and collaboration with senior management on pilot projects helps bridge crucial gaps.
Conclusion
When it comes to CEOs, prior experience can be a trap. It’s time to rethink the traditional emphasis on experience and focus on finding CEOs who are not blindsighted by and overconfident due to their experience.
References:
- Hamori, Monika, and Burak Koyuncu (2015), “The CEO Experience Trap, ” MIT Sloan Management Review, 55(1), (2013): 14-15. https://sloanreview.mit.edu/article/the-ceo-experience-trap.
- Hamori, Monika, and Burak Koyuncu (2015), “Experience Matters? The Impact of Prior CEO Experience on Firm Performance,” Human Resource Management, 54(1), 23-44. https://doi.org/10.1002/hrm.21617.