Why Boards May Want to Reevaluate the CEOs They’re Picking
When boards go searching for a new CEO, they tend to reach for fresh faces. But a new analysis suggests that this instinct may be costing shareholders.
A Korn Ferry analysis found that the stock performance of companies with first-time CEOs lagged that of veteran CEOs by a wide margin. Indeed, the annual stock return of a company that hired a first-timer averaged 16.3%, versus 36.3% for a company that chose an experienced CEO. Yet some 80% of firms are selecting newcomers to helm their companies, a move that appears to carry some drawbacks, notes Dan Shumate, Korn Ferry’s global practice manager for CEO Succession. “There’s a clear pattern that prior CEO experience is associated with stronger enterprise-value expansion,” he says.
These results come at a delicate time for boards: In the past two years, CEO departures and firings have occurred at a record clip, sometimes leaving firms scrambling. Amid so many openings, some organizations may have no choice but to select an internal or outside candidate that lacks CEO experience. But experts say stock performance figures could be a signal that boards need to better analyze their decision making process.
To be sure, the Korn Ferry study looked only at returns for one year, which isn’t long enough for most new leaders to enact their plans and visions. What’s more, market context reflects overall company performance even more decisively: Companies without a CEO change materially outperformed new-CEO firms on both stock price (42.6% vs. 18.9%) and market cap growth (42.3% vs. 22.2%). At the same time, CEOs promoted from within performed competitively, averaging 20% stock-price growth, while first-time external CEOs displayed the weakest overall performance. “Internal candidates have the advantage of understanding the company’s strategic and cultural priorities and have experience managing key stakeholders,” says Jane Edison Stevenson, global vice chair of Korn Ferry’s Board and CEO Services practice.
Given the strong performance of CEOs promoted from within, experts say boards need to focus succession planning on building a strong pipeline of talent. “There’s a significant jump to get into the CEO role, and the data show developing those capabilities pays off,” Stevenson says. One takeaway for her is that longitudinal agility and the ability to build a following swiftly are drivers of success. “Making the right decisions about who needs to be around the table is critical,” she says.
