2 reasons why outsider CEOs fail

Sometimes new CEOs who are hired externally perform brilliantly, turning companies into cash cows. But more often they don’t: CEOs hired from outside seem to succeed less than internally hired candidates, and their outcomes are less predictable, though the data is debated. Companies these days are hiring a lot of external CEOs. So how to pick a successful one?

Scholars are on the case. A trio of European coauthors from the University of Zurich, Frankfurt School of Finance and Management, and Bocconi University in Milan studied 1,275 new CEOs in 882 U.S. firms over a 13-year period, tracing their performance as well as their experience and surrounding general sentiment. It’s tricky to quantify sentiment, so the researchers tracked employee ratings, 27,000 press articles, analysts’ buy/sell/hold recommendations, and executives’ sales of their own company’s stock. They found that externally hired CEOs are likely to struggle not because they’re outsiders, but for two more specific reasons:

Bad match: Outside CEOs are more likely to have mismatching prior experience, coming from firms of sizes, ages, and specialties that differ from the company they’ve been hired to lead.
Bad buzz: External CEOs can face more negative sentiment, and lack the internal social networks and politicking connections to combat it. This hampers their effectiveness.

Negative sentiment is a psychological bias that causes people to perceive more negative behaviors and then dwell on them. In organizations, it can swiftly escalate to very real leadership impairments, such as less support, excessive scrutiny, and resistance among employees. It’s impactful: The researchers found that negative sentiment is more predictive of a CEO’s low performance than their length and breadth of experience or company fit.

Other studies have found results that similarly indicate that a CEO’s origin can combine with a handful of other characteristics to result in lower performance.