HOUSTON -- If you hire a new CEO this year, there's a 27% chancethey'll be gone within three years.

That's what Dr. Yan Zhang, professor at the Jones GraduateSchool of Management at Rice University, found when she researchedturnover trends among newly appointed heads of variouscompanies.

Zhang also found that those hired from within stand a greaterchance of staying on the job. Why? The study refers to at leastpart of the answer as "information asymmetry"--in other words,people already in the company know more about what's going on thanoutside candidates and are familiar with the corporate culture.

At the same time, the board has already seen the internal hirein action and has a better idea of that person's skills andrelationships with other employees.

Just as young people no longer expect to remain with one companyfor decades, the same is true for CEOs, Zhang agreed. Turnoveramong CEOs has increased in the past few years.

"The world has changed," she noted. "We have said good-bye tolong-tenured CEOs."

In fact, she has seen stories indicating at least one CEO wasdismissed after only 13 months. Could it be bad performance, shewondered? But just over a year is hardly enough time for a new CEOto make a significant impact. She figured something else must be atwork.

"The concept of information asymmetry is that one party in therelationship knows more than the other party," Zhang said. "In thiscase, the CEO candidate knows more about his or her abilities thanthe board. You may know from which school he graduated, but you maynot know his true competence. His smile is nice, but you cannotknow his true management skills."

That means, she added, the board of directors doing the hiringmight make a mistake. Only after the new CEO joins the company doesthe board have a chance to see how he conducts himself and how hecommunicates with employees. The first couple years may offer awindow for the board to more accurately assess the CEO.

Since the board has already had a chance to closely observecandidates from inside the company, does this mean promoting fromwithin is a better idea? Should credit unions be careful abouthiring someone who may have impressive credentials from a bank butknow little about credit unions?

"The financial sector is very specialized," Zhang answered. "Onthe one hand, if a credit union has a good inside pool of talent,it's better to recruit from within. It is risky to hire fromoutside. But a lot of times companies do not pay enough attentionto grooming candidates from inside. They have a very shallow poolof talent."

There's also the issue of potential continuity. It's good tohave stability at the top with a CEO who has been in office from awhile, Zhang said. A credit union's track record can provide a clueto future tenure. If the previous CEO was dismissed, it's likelythe next CEO will be dismissed.

When a CEO is suddenly gone, there's great pressure to find anew leader. The board needs time to make a good decision, ratherthan selecting someone in a hurry.

In general, Zhang sees as an advantage the fact that creditunion boards consist of members who are not executives of thecredit union. Those board members don't envision themselves ascandidates for the CEO position and can be more objective.

However, if the directors also sit on a number of other boards,they may be too busy to do an effective job on a nominatingcommittee.

"The process of hiring a new CEO is very time-consuming," Zhangemphasized. "You have to do a lot of homework and sort through alot of information."

In the study itself, Zhang sums up what she considers thepractical implications of her research:

It's important to have an effective nominating committee onboard --"one that is independent and/or has focused outsidedirectors, that is, with few external directorships."

Firms should limit the number of external directorships on whichtheir senior executives and board members can serve.

The dismissal of the predecessor CEO can increase the likelihoodof new CEO dismissal. While this doesn't mean boards should notfire underperforming CEOs, "the turmoil resulting from dismissal ofpredecessors can leave companies with a vicious cycle of CEOsuccession."

The findings on new CEO origin--hires from within are morelikely to succeed--suggests a need for caution when looking outsidefor a new CEO.

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