Can an Outside CEO Succeed? Look at the Board's Diversity

By Joann S. Lublin 

Outsiders -- whether in business or politics -- offer a powerful allure. They often bring innovative ideas and a healthy disregard for established practices.

Companies keen for such fresh perspectives frequently go outside for a new chief executive. Faced with falling revenue, retailer Office Depot Inc. recently hired Gerry Smith from Lenovo Group. He takes command next week.

But external leaders sometimes fail, typically because of a difficult turnaround or a vastly different corporate culture. A new study offers an intriguing additional explanation. Outside chiefs are more likely to have poor business performance and short tenures if their new employer's board is more diverse than corporate boards they previously served, Arizona State University researchers found.

Investigators tracked seven diversity measures that affect directors' decision-making: their age, gender, ethnicity, education level, Ivy League college background, functional area of expertise and industry background.

Boards should pay attention to an external CEO's past exposure to diverse boards because a corner-office recruit lacking such experience "often clashes with fellow directors at the new company," observed David H. Zhu, an associate management professor at Arizona State's W.P. Carey School of Business and the study's lead author.

"The firm's financial performance suffers following such extensive conflicts," Dr. Zhu continued. "An outside new leader must be able to work productively with the new board to help a company move forward."

He and colleague Wei Shen examined 188 instances of external CEOs joining 157 Fortune 500 companies between 1994 and 2007. Nearly three-quarters already had been directors of U.S. public companies. (That isn't true for Office Depot's Mr. Smith, however.)

Drs. Zhu and Shen looked at return on assets generated by external chiefs and whether they left within three years. A leader who experienced the biggest increase in board diversity at the fresh workplace delivered 38% lower returns than one with minimum gains in board diversity, according to Dr. Zhu. The same sort of new top boss was 19% more likely to exit quickly. Strategic Management Journal published his and Dr. Shen's research paper last December.

Such findings likely will intensify board efforts to groom internal CEO prospects and avoid the risks of choosing outsiders.

Just six of 58 leaders installed at S&P 500 companies during 2016 came from outside, reports Spencer Stuart, an executive recruitment firm. That represents the lowest percentage since the firm began monitoring CEO turnover at the biggest businesses in 2004.

Write to Joann S. Lublin at [e-mail]

(END) Dow Jones Newswires

February 21, 2017 07:14 ET (12:14 GMT)

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