In looking at performance of chief executives over 20 years, experience doesn't always make sense
Do you go with what you know or what you don’t know? That’s the dilemma facing many employers when it comes to planning to hire or hiring their next CEO.
Often, they pick a leader with experience, instead of someone new to the top role.
But that could be a mistake, says executive search and leadership consulting firm Spencer Stuart, in studying the performance of 855 S&P 500 chief executives over a 20-year period.
That’s because first-timers see higher market-adjusted total shareholder returns and, on average, lead three years longer, with less volatility in performance. And in looking at CEOs in both their first CEO role and subsequent CEO roles, 70 per cent performed better the first time.
Most experienced CEOs (97 per cent) outperformed the market in their first role, while just 38 per cent saw the same success in subsequent roles.
Downsides to experience, upsides to inexperience
While a veteran CEO may be more adept at governance situations, engaging the board and driving for results, one potential downside is their playbook, says Claudius Hildebrand, CEO data and analytics leader at Spencer Stuart in New York.
“A playbook can speed you up in your decision-making and give you confidence ― whether it's with your team or whether it is in a complex, politicized stakeholder situation ― but it will at some point show diminishing returns because those tools that you can find efficiencies in, they will diminish over time.”
While a playbook does have value, it is less effective these days, says Jean McClellan, national consulting people and organization leader at PwC Canada in Calgary.
“If we ever get into a period for business of stability, then that that might change, but, at this particular point, pandemic aside, we are headed into a period of likely high volatility within the business world. And that's where playbooks sometimes aren't quite as effective as they were in times where the business community was more stable.”
Newcomers bring an energy and a fresh outlook to the role, says Cathy Anterasian, a partner at Spencer Stuart in San Francisco.
“The high-potential rookie CEO is one who will bring this openness to exploration, curiosity about the situation, the ability to adapt and respond… critical and conceptual thinking to size up and frame problems and the potential solutions, interpersonal and social awareness skills to take perspective, understand dynamics at play, navigate important stakeholder interactions and bring teams together for effectiveness,” she says.
“That's not to say there isn't an important role for experience… It's not an either/or ― there's a role for experience in many circumstances. And it's worth taking a bet on potential on others.”
Takeaways for HR, employers
It’s about understanding what characteristics are better suited for the particular context of an organization, says Hildebrand.
“Oftentimes, the combination of experience and the adaptability that comes with potential is a real powerful source of success… So, when you find an experienced leader who maintains his or her adaptability, it's a tremendous opportunity to tap into the strength of what both of those characteristics bring.”
The best boards have a dialogue around how the strategy of the enterprise is likely to unfold, especially with all the uncertainty and complexity in the world today, says Anterasian.
“The board can align not only around ‘What is the one scenario we think we might face in the future?’ but ‘What are the range of scenarios that we might face in the future, given the forces at play?’ to have robust discussion about the future,” she says.
“It's using that insight to guide assessment and development of plausible internal players, and to use that same blueprint as an eye to thinking about ‘Who is there outside the organization that we think might be appropriate for… the range of scenarios that we might face?’”
In considering new leadership, it’s not necessarily about whether they're new or old to the position, says McClellan, “but more of a mindset and focus, and how they look at the world of business.”
From a market and employee attraction perspective, elements considered important for success in a leader include a focus on trust, which leads to a values-driven organization, along with a focus on employee well-being and diversity and inclusion, she says.
As we head into a period of volatility, it’s also about embracing a “paradox of skills,” says McClellan.
“That CEO is going to have to flex and be very digitally savvy, understand technologies, understand the art of the possible with respect to how to harness it, but also have very human qualities ― have very high empathy, high emotional intelligence and high creativity ― because… as technology is taking over a lot of the transactional data, humans are really needing to step in and be that creative force, the ones who innovate, the ones who think differently, and a CEO has to understand both aspects of that.”
