CEOs hired from outside firms more likely to be dismissed

Washington, June 4 : A new study has revealed that CEOs hired from outside are more likely to be dismissed because Boards of Directors commonly make mistakes during their appointments.

For example, during CEO selection, the board of directors of the hiring firm knows less than the candidates regarding the person's true competencies.

As a result, it is possible that the board makes a faulty hire and then dismisses the CEO shortly after the succession.

For the study, lead researcher Yan Zhang, associate professor of management, examined 204 company leaders from 1993 to 1998, out of which 55 left their job within three years.

It suggested that unbalanced information could negatively impact the selection of a new chief executive.

The researchers suggest that if they create nominating committees with leadership by outside directors, who tend to have broader perspectives on the skills of potential candidates, the problem of short-tenured external appointments can be avoided.

The study highlighted several factors that increase the chance that a newly appointed CEO will be dismissed or will succeed.

One major influence on failure arises from the fate of the predecessor CEO. In particular, failure tends to breed failure, such that the dismissal of the predecessor CEO substantially increases the likelihood that a newly appointed CEO will be dismissed.

By contrast, firms that create nominating committees that are led by outside directors are more likely to identify candidates who succeed in their new jobs.

"Results of this study can inform boards how to better manage the CEO succession process," said Zhang.

"It highlights the importance of having an effective nominating committee on the board and offers caution with regard to the tendency of firms to look outside for their new CEOs," Zhang added.

The study is published in the Strategic Management Journal.

ANI