It may surprise you but, according to new research by McKinsey & Co, new CEOs tend to adopt many of the same types of strategic actions in their early years upon appointment – from management reshuffles to cost-saving efforts – whether they had joined a well-run organisation or a poorly performing one. However, CEOs are more effective in poorly performing companies when they make a larger number of major strategic moves at the same time early on in their new role. And, significantly, for all types of company, CEOs who were externally-recruited, or who at least adopt a strong outsider’s mind-set, tend to produce stronger results.
These were the key findings in an interesting piece in the latest McKinsey Quarterly (May 2016,”How new CEOs can boost their odds of success”). The research was based on a review of the nature and effects (on their company’s performance) of strategic actions taken by some 600 CEOs who ran a S & P 500 company in the US between 2004 and 2014, together with a review of 250 case studies. Companies’ performance was assessed in terms of ‘annualised returns’ to shareholders (a complex definition was given, but don’t worry!).
The research considered nine specific types of strategic move taken by CEOs and found a similar frequency of usage across poorly and well-run companies within the executive’s first two years of appointment:
Strategic move Use % by co’s doing well Use % by co’s doing poorly
Management reshuffle 66% 72% Merger/acquisition 59% 54% Cost reduction program 42% 49% New business/product launch 38% 37% Geographic expansion 26% 32% Organisation redesign 26% 29% Business/product closure 19% 18% Strategic review 14% 31% Geographic contraction 9% 5%
However, despite this generally similar frequency of use, the efficacy of certain of these moves was found to differ significantly depending on the context of the company. To be precise: strategic reviews were very helpful for poorly performing companies but less helpful for companies that had been performing well; organisational redesign was helpful for well-performing companies but not for low performers; and management reshuffles were helpful for poorly performing companies but actually unhelpful for well-performing companies. The researchers recognised that, of course, there are very many variables that drive and influence company performance, not just a few specific measures taken by a CEO, but they did consider these particular findings very plausible.
What I found particularly interesting from the study, though, were the findings regarding the number of major moves that a CEO took and whether he/she was appointed from inside or outside the organisation.
The researchers found no discernible pattern regarding the number of major strategic moves at well-performing companies, but in poorly performing ones the key finding was that CEOs who made four or more strategic moves at the same time during their first two years achieved significantly higher performance over their tenures compared to their less bold counterparts in similarly companies.
Regarding the background of the CEOs, the study found that externally appointed executives had a much greater propensity to act and be bold: they were more likely to make six out of the nine strategic moves examined: in particular, externally appointed CEOs were much more likely than internally promoted CEOs to adopt an organisational redesign, cost reduction program, geographical contraction, business/product closure, or merger/acquisition. Poorly performing companies were more likely to appoint an external CEO and, where they did, they were found to outperform their internally promoted counterparts by a margin of more than five to one.
These findings about the greater boldness of outside hires do seem intuitively very reasonable: one would expect external CEOs to feel generally less encumbered by organisational politics or inertia and to adopt more of an outside view compared to their internal counterparts. However, as the article reminds the reader, performance differentials are the result of multiple factors, not just any single factor like the background of the CEO. Also, crucially of course, it is possible for an internally promoted CEO to cultivate the necessary outsider’s mind-set: it just appears that such a CEO appears relatively less often than an appropriately-minded external CEO.
The problem, though, in pointing to the value of an externally-minded CEO is that often in many organisations – poorly and well-performing ones – the culture of the organisation or the Board itself does not actually encourage an outside, different or challenging mindset! Especially in a very established organisation or one that has quite a settled top-team or a very traditional culture, it can be very uncomfortable and threatening for a CEO to ‘raise their head above the parapet’ and promote serious change or new thinking. Accordingly, an organisation in this situation – particularly the Board – needs to ensure it has wider mechanisms and arrangements in place to boost the inclination of its management to think differently and adopt that ‘outsider’ perspective prescribed in the above study.
There are, of course, many types of arrangement which organisations can put in place to help foster an ‘outside-in’ / multi-view perspective amongst its senior management. A few quick examples: ensure the Board itself has a reasonably diverse range of members and that some of the membership changes at regular intervals; have senior people go and visit / meet with clients regularly; set up a stakeholder / customer Advisory Board; ensure the Board has dedicated discussion time at each meeting to review one or two strategic issues; make one Board member a dedicated champion for strategic thinking and innovation; invite individuals from outside organisations that are doing novel or progressive things to come and speak at your Board meeting; and ensure your organisation has a good, ongoing ‘eyes and ears’ intelligence system for spotting trends and developments in your industry. Another approach is to hire a suitably experienced external professional to be your outsourced ‘external strategic adviser/manager’ to work with your Board, help their thinking, and also handle a lot of the detail of the strategic management process: this is a service that Owen Morris provides.
Altogether, an interesting article that gives some valuable pointers for newly appointed CEOs to consider. But, at the same time, Boards must remember that organisational success cannot just be left, of course, to the boldness or background of their CEO: Board directors need themselves to look at how they think and operate, as well as ensuring the organisation has in place a strong mix of wider business and organisational strategies and policies.