When a CEO steps down or is dismissed, the attention of the board is on how to choose the right executive to succeed that CEO.
However, Bocconi University professor Dovev Lavie claims that managing the process of introducing the new CEO and choking the negative sentiment that can arise among stakeholders in a moment of uncertainty could be a more critical task, especially when the new CEO comes from outside the firm.
The effect of such a negative sentiment, which is a form of psychological bias, on a firm’s performance is stronger than the implications of the new CEO’s previous experience and fit between the CEO’s corporate background and the appointing firm’s characteristics.
Professor Lavie and co-authors Thomas Keil (University of Zurich) and Stevo Pavi?evi? (Frankfurt School of Finance and Management), in a paper in-press on the Academy of Management Journal, investigate the link between the appointment of an outside CEO and a firm’s performance.
The appointment of outside CEOs has become increasingly common in recent years, with about a third of appointed CEOs originating from outside the firm. Yet most studies report that they underperform compared to inside CEOs and exhibit greater performance variability. [Read more…] about Stakeholders’ sentiment can make or break a new CEO