Management Turnover as Change Agent

Wednesday, January 20, 2010

Recommended Reading - Once an Outsider, Always an Outside? CEO Origin, Strategic Change and Firm Performance - Rice University

Yan Zhang, a professor at the Jesse H. Jones Graduate School of Management Rice University and Nandini Rajagopalan from the Department of Management and Organization at the Marshall School of Business University of Southern California have written a fascinating paper entitled, Once an Outsider, Always an Outside? CEO Origin, Strategic Change and Firm Performance. The authors according to a piece in Cellular- News have put together a,

... study that looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside. However, in later years, internally promoted CEOs outperformed externally hired CEOs.

“Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes,” Zhang said. “Therefore, the relative advantage or disadvantage between ‘inside’ and ‘outside’ CEOs in initiating and implementing appropriate strategic changes is not seen immediately.”

However, after three years, it’s clear that inside CEOs fare better than outside CEOs, according to Zhang. “When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for cost cutting and divestment dry up. Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm’s long-term competitive advantage,” Zhang said.

After reading the paper, I was not at all convinced by the research results presented by the researchers but anyone interested in key executive changes and what they mean with relation to corporate performance should read the paper.

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