Updated: Apr 22
When seeking the best CEO candidate, boards might begin with lofty goals. But directors recognize that a botched succession could hurt their reputations (not to mention their shareholders), so in many cases they end up focusing not only on the upside potential of a candidate but also on the downside risk, asking: Who is the safest choice? Who is least likely to fail? And their answer is often the candidate with prior experience in the top job. In fact, the share of newly hired CEOs who previously held the role has quadrupled since 1997 and now stands at 16%.
In most endeavors, experience is a good thing. But new research from the executive recruiting and leadership advisory firm Spencer Stuart finds that for CEOs, it often carries surprising costs. In a study of 855 S&P 500 CEOs appointed over a 20-year period, the researchers found that those with experience in the role consistently underperformed their novice counterparts over the medium to long term. First-timers led their companies to higher market-adjusted total shareholder returns, with less volatility in the stock price. Among CEOs who headed two successive companies, 70% performed better the first time—and for more than 60%, their second companies failed to keep pace with the overall stock market.
Why do so many seasoned leaders lag? Having interviewed 50 directors and CEOs, the research team believes it happens because they fall back on the playbook from their last job, become overly concerned with cost-cutting, and are less adaptable than rookies, who tend to pay more attention to top-line growth. “First-time CEOs’ longer-term orientation and more balanced focus between profitability and revenue growth is reflected in their performance,” the researchers write. “Even in challenged companies, first-timers attempt to lead through a mix of growth and return on capital.” Rookies are also likely to stay in the role longer (nine years, on average) than experienced CEOs (six years), in part because they are generally younger.
Some of the difference in performance, the researchers explain, has to do with mindset. “In many ways, these results are not surprising,” says Cathy Anterasian, who coleads Spencer Stuart’s North American CEO Succession Services group. “We’ve been talking with boards over the past decade about the importance of curiosity, adaptability, flexibility, and the ability to confront problems with fresh eyes rather than with rules of thumb.” First-time CEOs, she says, are more likely to approach problems in this manner.
Experienced CEOs did display some advantages, including wider access to external resources and to talent and other critical relationships. “There’s also a speed component,” says Claudius Hildebrand, Spencer Stuart’s CEO data and analytics head. One two-time CEO reported that he accomplished as much in the first two years of his second stint as he did in the five years of his first stint. And although the research suggests that repeat CEOs focus too much on cost-cutting, their recognition of the importance of short-term results can be a plus. “Experienced CEOs know how to deliver value to shareholders and the Street, how to free up resources to fund what they may want to do next, and how to get some quick wins,” Anterasian says. In addition, she and Hildebrand point out, when a company is in trouble, the board may prefer an outside hire with a track record to an untested internal successor—so some of the performance differences may reflect the fact that experienced CEOs often face more-challenging circumstances.
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Even leaving performance aside, there’s a troubling downside to relying on existing CEOs. The overwhelming majority of people helming large companies are white men: Just 6% of the CEOs of S&P 500 companies are women, and only 10% are ethnic or racial minorities. So when recruiters looking to fill a CEO job focus on that pool, they are perpetuating the lack of diversity in the C-suite. The preference for experienced chief executives, the researchers write, “represents yet another barrier to underrepresented groups.”
How can boards use these findings when planning succession? Before homing in on specific candidates, they should be clear about what challenges the incoming leader will confront and what his or her priorities should be. If the company would benefit most from a shorter-term leader who’s skilled at cost-cutting and creating quick wins that will please financial markets, an experienced CEO may be the better pick. But if revenue growth and a longer-term orientation are key concerns, someone new to the role may be more appropriate—and if boards are considering an experienced candidate in this sort of situation, they should conduct “an explicit dialogue about the type of talent needed based on the desired outcomes and specific business context,” the researchers say.
Boards should also assess how well candidates listen and whether they enjoy grappling with unfamiliar problems. When the research team interviewed CEOs who had succeeded in both their first and their second assignments, it learned that these executives were careful not to assume they knew all the answers the second time around. Rather than try to run the same plays again, they asked questions and explored what was different about circumstances in their new companies.
“With this research, we hope to shift the default,” Hildebrand says. Instead of presuming that experienced CEOs inherently have better qualifications than first-timers, boards should view them as having different qualifications—ones that might or might not mean superior performance.
And counterintuitive though it may seem, the researchers say that experience might be even less valuable during the current period of high uncertainty. “It’s the old adage: ‘What got you here may not get you there,’” Anterasian says. “During times like these, the ability to understand problems you haven’t seen before becomes much more important.”