BA-BM-When CEOs Stay on Board

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When CEOs Stay on Board



Feb 20, 2012


The succession of a CEO is an occasion for strategic realignment in organizations that may have fallen in to deeply established routines, entrenched cultures, or those that are just in need of a new perspective. No matter the reason, the general expectation is that some level of change will occur in an organization under new management. But, what if this new leader is stepping in even though their predecessor is not stepping out? More specifically, how does the retention of a former CEO affect the actions of an incoming CEO?

A recent survey by Booz & Company notes that more than half of incoming CEOs in planned succession are taking office while their predecessor remains in a chairman role. The survey result brings to light an interesting question – how do these lingering predecessors impact the influence of the new CEO?

Research from a professor at the Penn State Smeal College of Business suggests that the continuing presence of a predecessor CEO as a board member not only restricts a new CEO’s discretion, but may also restrict the degree to which the new CEO can alter company performance.

Donald Hambrick, Evan Pugh Professor of Management, and co-author Timothy Quigley, assistant professor at Lehigh University and former Ph.D. student at Smeal, analyzed a sample of 181 CEO successions at high-technology firms to determine the extent to which predecessor retention constrains incoming CEOs. Taking into account a firm’s capacity for change, the need for change, and typical indicators of a board’s desire for change (hiring an outsider, forced succession, elevation of an heir apparent), the researchers find that predecessor retention suppresses a number of strategic changes. These include resource allocation, divestitures, and executive replacements. In other words, new CEOs are limited in the degree to which they can generate any sort of distinctive result from their predecessor. As long as the predecessor remains as a board chair, company performance tends to adhere to pre-succession levels.

“Incoming CEOs who are in the presence of their predecessor might be completely intent on just delivering profitability and shareholder returns,” write the researchers. “While there may be no apparent concern regarding their objectives from other members of the team, the extent to which they are able to deliver exceptional performance, whether it be positive or negative, is limited.”

Furthermore, the findings show that once a former CEO does step down from his/her chair position, an abrupt increase in resource allocation, divestitures, executive additions, and executive departures is observed. This suggests that the constraining influence of a retained CEO is not permanent, creating what the researchers call a “quasi-succession.”

“The retained predecessor doesn’t indelibly dissuade the new CEO from considering changes,” they write, “instead, the new CEO – who is probably eager to enact some changes – puts a host of actions on hold.” Rather than getting caught in such a holding pattern, the researchers suggest that in order to keep the firm-up-to-date during this transition process, the board bid the former CEO farewell completely. Otherwise, if they seek the benefit of the predecessor’s wisdom and experience, a reasonable option would be to retain them strictly in a consulting capacity for six months or so.

The study, “When the Former CEO Stays on as Board Chair: Effects on Successor Discretion, Strategic Change, and Performance,” is forthcoming in the Strategic Management Journal.


Source: www.research.smeal.psu.edu