Relevance of Industry Expertise When Choosing a New CEO for Restructuring and Renewing Mission?

Introduction

Very often when company is in a turmoil and needs turnaround of some sort or some radical change due to its poor performance or for some other reasons, owners (new or old) are looking for a new CEO to get that job done. How should owners (or the "Board of Directors") go about that task, whom should they pick? Is this task the same or different when picking a CEO in a regular succession in stable times?

Insider or Outsider

Some statistics state (see the article: "The Most Successful CEOs Crom from Within") that the best CEOs come from within the company and that someone who has been with the company for a while and has raised through the ranks will have better performance than the outsider. But can that be applied to the company that is in distress, or for the company that the new owners have purchased and now want complete turnaround? Research suggests that outsiders are better pick if that is the (see the article "When Is an Outsider CEO a Good Choice").

Trust a as Soft Component

To expand a bit more, even though the line managers from within the company may be ripe to take the CEO role, may have the potential, skills and be highly qualified for the job, there are several issues that may arise with such approach. One of the issues may be some sort of trust. The question is whether new owners will be comfortable to leave the “old management” in charge of the “new strategy” or simply whether they will believe that this CEO from the “old” ranks will be the right fit in terms of adapting to the new acquiring company’s (team’s) culture? Most likely, the answer here is no. New owners that plan some sort of turnaround will likely want an outsider (no matter skills and other factual, “technical” data). It is also a subjective, soft skills decision.  

Industry Expertise in a Complex World

This article will explore dilemma whether that outsider should be an industry expert, should she/he come from within the same industry this company is in. Or can she/he come from some other industry without the knowledge of the company’s industry, its markets, this particular industry's trends and other industry specifics.

There are lots of cases as well as articles written on this subject and there are cases when outsider CEOs without industry knowledge have succeeded as well as when they have failed. Hence, this article will not focus on these statistics here, but rather on a certain argumentation for this narrow area of CEO’s “must have": industry expertise.

In cases when Boards pick CEO without industry expertise, they believe that lack of industry knowledge can be overcome with high levels of other skills necessary for CEO in such situation. Skills such as leadership, perseverance, high levels of energy and diligence, general knowledge of business strategy, even technical skills such as finance etc.

But in a today’s complex world when industry trends (not only tech, but even old conservative industries such as e.g. textile – see the article "The Death of Clothing"), finance (see the article "Fintech") are changing rapidly and even worse, being disrupted, industry expertise is something managers need to master and hit the ground running with it. New CEO that needs to act quickly (and companies in distress require such approach) will not have time to learn about new industry and industry markets and trends. 

Where the Expertise Should Come From

Sometimes the argumentation is that someone from another industry will bring something that has not been seen by current team, uncover some “blind spot”. And yes, that is a valid argumentation, but that “somebody”, should not be CEO. Not the main person that needs to call shots and call them quickly. CEO should get such inputs from her/his team, evaluate them and act upon them (or not).

More valid argumentation would be that this new CEO, personally, does not need to have industry expertise if her/his teammates have it. Afterall, you cannot implement any changes by yourself, you certainly need a team.

CEO’s Team

But there may be an issue with this argument as well. Because when you land in a company that is in distress, there are few things you will likely run into regarding the management staff. If the company is in distress for a while, most likely best people are looking for exit or have already left. On the other side, they might have been part of the problem in a first place, i.e. maybe they do not want the change and they have contributed to the problematic situation the company is in. In either case, it is rather unlikely that you will get a dream team for such strenuous task that awaits you. Renewal process is not easy (see article "Restructuring vs. Renewal"). Also, it will be much harder for CEO to gain “personal power” based on industry expertise (i.e. lack there of). CEO will need as much of this “personal power” in order to gain influence and use it to build cohesive coalition and team. This coalition building is crucial for implementing hard decisions (and in restructuring there are many).

Source and Quality of the Team

So most likely CEO will have to bring in her/his own new team, or at least some of the crucial key players. If CEO is not the expert in the industry, she/he will have to rely on someone from the team to cover that key area. But then again, the “incumbent” management is not a solution due to problems mentioned before. If the new team is brought from the outside, CEO will hardly be able to evaluate their expertise on her/his own (not being an expert) and again some other source has to guarantee the quality of the team. Hopefully Board of Directors can be this source and hopefully they are experts in the industry. With their interests aligned with CEO’s, it can be assured that they will supply the best industry experts for the team. But in this case, they (the team) will know they are not “CEO’s team”, but that they are “Board’s team” and that can lead to a lot of other issues that are not theme of this article (such as double lines of reporting and communication etc.). The worst thing CEO can do is bring more “non-experts”. Such team will live in harmony and piece in its “groupthink”, but the company will continue downward trends.

CEO “the Expert”

Hence, the easiest way this dilemma can be resolved, is that the industry expert is brought as a new CEO. Such CEO can not only cover industry expertise on his own (that’s not the requirement), but she/he is very well connected and knows many more industry experts or support role functions that know the industry (and that is also helpful). She/he can bring those people to the team and they can start working very quickly. They can almost hit the ground running, as they will be established and organized team.

Industry expertise is a very important asset that needs to be brought into the team to the company in distress. And it needs to be brought from the outside. Without this expertise, precious time will be lost and that may be the reason for making it or breaking it.