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

That's what Dr. Yan Zhang, professor at the Jones Graduate School of Management at Rice University, found when she researched turnover trends among newly appointed heads of various companies.

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

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

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

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

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

"The concept of information asymmetry is that one party in the relationship knows more than the other party," Zhang said. "In this case, the CEO candidate knows more about his or her abilities than the board. You may know from which school he graduated, but you may not know his true competence. His smile is nice, but you cannot know his true management skills."

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

Since the board has already had a chance to closely observe candidates from inside the company, does this mean promoting from within is a better idea? Should credit unions be careful about hiring someone who may have impressive credentials from a bank but know little about credit unions?

"The financial sector is very specialized," Zhang answered. "On the 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 from outside. But a lot of times companies do not pay enough attention to grooming candidates from inside. They have a very shallow pool of talent."

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

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

In general, Zhang sees as an advantage the fact that credit union boards consist of members who are not executives of the credit union. Those board members don't envision themselves as candidates 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 nominating committee.

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

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

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

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

The dismissal of the predecessor CEO can increase the likelihood of new CEO dismissal. While this doesn't mean boards should not fire underperforming CEOs, "the turmoil resulting from dismissal of predecessors can leave companies with a vicious cycle of CEO succession."

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

--ecourter@cutimes.com

Instant Insights /

Turnover Can Be as High as 27% Among CEOs Hired From the Outside

Related Stories

Recommended For You