The CEO Experience Trap

WHEN COMPANIES HIRE new leaders, they most often place their bets on CEOs with plenty of previous experience.
The CEO Experience Trap

But according to a new study, a company might see better outcomes if it takes a risk and hires someone with little to no prior experience.

Burak Koyuncu of NEOMA Business School in France and Monica Hamori of IE Business School in Spain looked at data on CEOs who had been at the helm of S&P 500 corporations since 2005, tracking their performance for up to three years. They found that the average return on assets for those who had transitioned from one CEO position to another was 48 percent lower than for those who had no prior experience or who worked in different positions between CEO jobs.

In many cases, CEOs need more time to “unlearn” the approaches they used in their old positions. They often try to apply old solutions to new problems, says Koyuncu, “because they have developed fixed assumptions about how tasks should be done.”

These findings don’t mean that companies always should hire inexperienced CEOs. But the authors recommend that when companies hire individuals straight from other CEO positions, they place them in interim positions for a year or more to learn the nuances of their new companies before taking the helm.

“The greater the opportunity for acculturation, the greater the chance the company can avoid falling into the CEO experience trap,” said Koyuncu.

“Experience Matters? The Impact of Prior CEO Experience on Firm Performance” is forthcoming in Human Resource Management.