The Myth of the Been-There, Done-That CEO

Most boards of directors begin their succession planning discussions by thinking about their internal leadership bench. They speak to the incumbent CEO and Chief HR Officer about who among the company’s top executives are most likely to have the right stuff to be considered as a CEO successor. They reflect on the presentations that they’ve seen company leaders make and the impressions from board dinners and other interactions.

But when it comes time to think about who will actually be the right leader to take over as CEO, many boards default to an assumption – that experienced CEOs outperform first-time CEOs. 

However, based on Spencer Stuart’s 2017 CEO Study[1], boards would be well advised to disregard that assumption and look at the landscape with fresh eyes. Our analysis shows two important things:

·        The vast majority of appointed public company CEOs are first-timers

·        There is no performance advantage of experienced public company CEOs over first time CEOs.

Since 2004, 88%, or 607 of the 689 S&P 500 CEOs were first time CEOs. As you may recall from the first installment of this Patterns in CEO Success(ion) series, there has been a dramatic increase in the incidence of CEOs promoted from within. Internal promotes are almost always first timers, 94% of the time to be precise. And many have worked out brilliantly. (Note, many of the internals with prior public CEO experience were insiders after their companies were acquired.)

One example of a highly successful first-time CEO is Bruce Chizen, who was one of the outstanding performers in the data set. He was named CEO of Adobe Systems, the software company, in 2000, after holding the President role for 8 months. Prior to becoming CEO, he spent 7 years at Adobe, with roles overseeing various divisions – worldwide products and marketing, graphics professional and consumer. Prior to joining Adobe, Chizen spent time working for Mattel Electronics, Microsoft, and Claris Corporation (the Apple Computer start-up). He had a diverse career path across various functions and business unit roles, in which he enhanced his track record at multiple companies, and then he got his vital P&L experience at Adobe, where he helped grow the company’s revenue from $1 billion to $3 billion.

There are also many examples of first-time CEOs recruited from the outside that worked out well. For example, John Rowe was appointed CEO of Aetna in 2000, at a time when the company was highly challenged. Despite being a first-time CEO, he managed to lead a dramatic turnaround. Rowe joined Aetna from Mount Sinai NYU Health, where he led the private hospital system from 1998 to 2000. He had not-for-profit CEO experience, but had never navigated the investor and governance expectations of a public company, much less one of Aetna’s scale as the largest health insurer in the United States. From Aetna’s low point in 2001 to Rowe’s retirement in 2006, Aetna’s market value grew by over $23 billion.

Perhaps surprisingly, 75% of CEOs appointed from the outside were also first-time public company chief executives. Even some of the highest profile external appointments, such as Alan Mulally, going from Boeing to Ford as CEO in 2006, Hubert Joly going from Carlson to Best Buy in 2012, and Meg Whitman going from Hasbro to eBay in 1998, were all first-time public company CEOs.

There are exceptions of insiders having previously been public company CEOs. Examples include Dan Schulman, who was promoted from President to CEO of PayPal, after having earlier in his career been CEO of public company Virgin Mobile, and Kevin Johnson, who was recently promoted from President and COO of Starbucks to succeed legendary founder and CEO, Howard Schultz. Johnson is actually an example of an exception to typical CEO succession. He had been a public company CEO, at Juniper Networks from 2008 to 2013 and he has been on the Starbucks Board since 2009. So he was appointed as CEO from the board. However, he also came into the company in a full time capacity as President and COO in 2015, so he is an insider as well.

In many cases when boards are considering external candidates for CEO, the logic is that if they are going to take the risk of a misfit on the critical aspect of culture, often colorfully referred to as “organ-transplant” risk, at least they should try to mitigate the uncertainty of having the candidate have to learn the job. Hence the bias toward a “been-there-done-that” candidate with prior public company CEO experience. The facts, however, are that, as mentioned above, it is actually very rare for S&P 500 companies to appoint prior public company CEOs. And when they do, the performance is not what you might expect.

When we analyze the performance of first-time CEOs vs. experienced CEOs (remember we did individual case studies of each of the 689 CEO tenures from 2004 to 2016), we see an interesting picture. In the chart below, you can see that there is an equal distribution of performance for first-time CEOs over the course of their tenures. Roughly one third of first-timers led companies that achieved outstanding performance (total returns to shareholders relative to industry peers and the market, revenue and net income growth), and about the same proportion achieved solid results (roughly equal to industry peers and the market), and poor results (underperforming the market). 

For experienced CEOs, the mix is less rosy. Only 29% achieved outstanding performance, 26% led to solid performance, and 45% led their companies to achieve poor results relative to industry peers and the broader market.

However, before you draw the conclusion that experienced CEOs are not the way to go, it’s essential to consider the contexts into which each category of business leaders were hired. When companies were in a crisis or challenged state (defined by under-performance relative to industry peers and the broader market in the year prior to CEO transition), they appointed experienced CEOs in disproportionate numbers. This obviously makes superior performance more challenging. Specifically, 61% of experienced CEOs were appointed into challenged companies; and only 39% into healthy companies. By contrast, only 51% of first-time CEOs took over challenged companies; 49% were appointed into healthy companies.

*The total number of CEOs refers to the CEOs who entered into healthy or challenged companies. This group does not include those CEOs who started before a company was public or S&P 500 started tracking TSR in 1989.

So the real insight here is one of context. When experienced CEOs performed poorly, they were much more likely to have taken on a turn-around challenge. There are many inspiring business leaders, such as Jack Messman of Novell, James Houghton of Corning, and Allen Questrom of JC Penney, who were indeed up to the task and achieved outstanding performance. But in many other cases Warren Buffet’s guideline held firm when he said,

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact [2]

IMPLICATIONS OF THE MYTH OF THE “BEEN-THERE-DONE-THAT” CEO

What are the implications of the preponderance and advantages of first-time CEOs?

For the board director:

• Recognize that the majority of CEOs are in fact first-timers, so be open-minded as to who will be best for your situation and context. Understand that the key to making the best CEO decision is to determine what the leadership requirements will be for success in the future and make your assessment on who is most likely to have the potential to grow into the role.

For the aspiring CEO:

• Understand that you have to build the component parts of the CEO role in different positions and experiences along the way – P&L general management in business units and geographies, functional responsibilities such as CFO or CMO, being able to take an enterprise-wide perspective despite not yet having enterprise-wide responsibility, performing strongly in each of your roles, and developing followership among your teams. 

Next up, we will look at CEO tenure as we continue to build a comprehensive picture of public company CEO successions.

[1] Spencer Stuart has created individual case studies for every S&P 500 CEO succession from 2004 through 2016, involving contextual evaluation at the time of appointment and quantitative performance analysis over the course of the CEO’s tenure. For more information, see Spencer Stuart S&P 500 CEO Quarterly Transitions.

[2] https://www.brainyquote.com/quotes/quotes/w/warrenbuff163581.html