The Right CEO for a Recession

What type of CEO do you want leading your company when times get tough?

Two seemingly opposite answers are often given: The first would be a long-tenured insider who knows every nook and cranny of the company and has already seen it through multiple business cycles. The second would be an experienced outsider who can bring a fresh set of eyes to problems and challenges.

Most companies only have one CEO at a time – so which one should a board choose?

To help inform this dilemma, we recently analyzed the performance of the largest US public companies during the December 2007 to June 2009 recession, and compared the CEOs at companies with the strongest recoveries (top quartile) to everyone else.

There are few quantifiable differences between the two groups of leaders. But those that emerged show the value of a hybrid type, the independent-minded insider who knows the company well enough but is not beholden to the old ways of doing things.

WHAT WE FOUND

Perhaps surprisingly, by 2010 the majority (62 percent) of the 400 companies had returned to or exceeded their 2007 profit levels. The top 100 companies had an average 95 percent increase in EBITDA between 2007 and 2010. The bottom 300 companies' average as a group in 2010 was 11 percent below 2007 EBITDA levels.

Experience at the company:
Insider CEOs dominated; 70 percent of top 100 companies started 2007 with a CEO who had already proven themselves at the company, as did 78 percent of the bottom 300. However, the insider CEOs at top 100 companies had climbed the corporate ladder much faster than others. They also tended to be two years younger, on average, than the insiders at bottom 300 companies.

Experience as CEO:
Time in the CEO role was similar for both top and bottom performers, an average 6.6 years for top 100 vs 6.0 for others. There was also no significant difference in the types of roles they held before becoming CEO or whether the CEO was a founder.

Choosing a new CEO:
On average, just under 8 percent of companies in each group turned over their CEOs each year from 2007 and 2010, with slight increases during the peak years of 2008 and 2009. However, when selecting a replacement, top-performing companies were more likely to hire an outsider for the corner office.

WHAT IT MEANS

Using the 2007 S&P 500 list and EBITDA metrics, we found that higher performing companies had CEOs who had spent less time in their organization before becoming CEO than lower-performing companies. Based on our experience, these CEOs were likely independent-minded insiders who knew their companies well but had not yet become calcified in the status quo when they were appointed to their roles. This may have allowed them to effectively challenge past conventions and respond more nimbly in the face of a major economic crisis.

A key learning from this research is that boards should challenge themselves to move outside their comfort zones in the CEO succession process. While the company veteran who has worked her way through every function and level might be a good choice, someone with fewer years of experience but a more agile leadership approach may be a better one.

The best companies assume that what they’re doing today will put them out of business or limit them in the future, said Margot McShane, co-leader of Russell Reynolds Associates’ Board and CEO Advisory Partners.

Candidates with an unusual mix of experiences frequently have the ability to see things differently than others, as well as the curiosity, courage and conviction to take action when presented with a new opportunity.

It’s not just an objective perspective on the company, she added, but an objective perspective on the customer, competition and business landscape. They’ll take something that everyone thinks of as ‘blue’ and see it as ‘yellow’ or ‘green.’

In recent years, however, boards seem to be moving in the opposite direction of these success variables. Since 2015, large companies have appointed older CEOs, on average, than they did in the previous five years . Often, these are high-quality candidates and represent excellent choices. However, they may also be an indication that some boards are leaning toward overly safe and conservative options.

Identifying unconventional CEO candidates is a process that can – and should – start well before a transition looms. A wise strategy is to begin succession planning early and on multiple fronts, said Amy Hayes, head of Russell Reynolds Associates’ Leadership & Succession practice in the Americas.

Leaders should develop internal candidates, while simultaneously bringing new high potential talent into the organization with enough time for them inspire confidence with key stakeholders in advance of a succession event.

Choosing a CEO who does not fit the mold takes courage, particularly during challenging times. By considering these insights, though, boards can increase the chances that their companies will emerge as winners when experiencing difficult economic and market conditions.

AUTHORS
DEAN STAMOULIS is a senior member of Russell Reynolds Associates’ Board and CEO Advisory Partners. He is based in Atlanta.