A recent article by global consulting firm, McKinsey & Company studies How New CEOs Can Boost Their Odds of Success – this data-driven approach, studies the link between the strategic moves of new CEOs and the performance of their companies while highlighting the importance of quick action and adopting an outsider’s perspective.
In an attempt to explain the link between a CEO’s success and the success of the companies they lead, McKinsey & Company took a different approach than the traditional qualitative explanation – given the relationship can be largely explained in qualitative terms (being misled by outliers or come to the mistaken conclusion that prominent actions seem correlated and are responsible for success).
McKinsey tried to sidestep these difficulties by systematically reviewing major strategic moves (from management reshuffles, to cost-reduction efforts, to new-business launches, to geographic expansion) during the first two-year tenure of 600 S&P 500 CEOs who made company moves between 2004 and 2014. Using annualized total returns to shareholders (TSR), the firm assessed company performance over the CEOs’ tenure in office.
One interesting find (see Exhibit 1 below) from the study is that new CEOs act in similar ways and with a similar frequency whether they had joined well or poorly performing organizations. Another thing to take note of is that, CEOs in different contexts made bold moves – such as M&A, changing the management team, and launching new business and products – at roughly the same rate. However, similar moves didn’t necessarily had the same effectiveness.
Other key takeaways include:
- Organizational redesign was correlated with significant excess TRS (+1.9 percent) for well-performing companies, but not for low performers.
- Strategic reviews were correlated with significant excess TRS (+4.3 percent) for poorly performing companies but were less helpful for companies that had been performing well.
- Poorly performing companies enjoyed +0.8 percent TRS when they reshuffled their management teams. But when well-performing companies did so, they destroyed value.
When hiring a new CEO, boards face a difficult question: promote an executive from within or choose an outsider? In the study, McKinsey also sought to find whether the performance of outsiders and insiders differed significantly. The study found that externally appointed CEOs have a greater propensity to act – they were more likely to make six out of the nine strategic moves analyzed. Not surprisingly, external CEOs almost certainly have a leg up when it comes to bold action and poorly performing companies are more likely to seek external talent.