One of the difficult aspects of measuring new C-level executive performance and how that correlates to organizational success is that too often the impact of the moves made by the executives is not realized until years down the road. With a qualitative perspective, the performance of newly appointed top-line executives can often be skewed by outliers or mistaken credit given for organizational actions. According to a recent McKinsey study though, there are two distinct factors that correlate to success: Strategic actions within context and an outsider’s perspective were viewed from a quantitative perspective.
“Strategic actions and an outsider’s perspective correlate to success.”
The McKinsey study
The research examined the strategic moves made by new CEOs at 600 well-performing and struggling S&P 500 companies during their first two years of tenure at the organization from 2004 to 2014. Specifically, the study analyzed the above data coupled with 250 case studies to show the visible results of how those actions translated into increases in annualized total returns to shareholders and the overall stability of these organizations. The strategic actions that occur most commonly include management reshuffles, M&A, cost-reduction initiatives, new business or product launches or closures, territory expansions and contractions, reorganizations and strategic reviews.
The study found that regardless of the health of the organization prior to the CEO’s tenure, the strategic moves made correlated to the same levels of success. Interestingly though, the study found that the more moves CEOs make at struggling organizations, the more of a positive impact there is on performance. Furthermore, external CEOs were shown to be more likely to act than internal hires.
Overall, though, the study concluded that strategic moves made within the context of the organization’s current health were more effective, and often made by external hires.
The effectiveness of the moves
While the types of moves and the number of them are similar, their impacts were very different. For instance, for CEOs who took over high-performing companies, reorganizations were found to improve annualized total returns to shareholders by 1.9 percent, but had little impact for struggling organizations. In contrast, strategic reviews had much more of an effect on annualized total returns to shareholders at weaker companies, increasing them by 4.3 percent, with no impact on high performing companies. A final significant result of the study was that management reshuffles provided an 0.8 percent boost to annualized total returns to shareholders for poor performers, but not stronger companies. In fact, at high-performing companies, this had a devastating impact to annualized total returns to shareholders.
A Harvard Business Review report on CEO decisions supported these findings, showing that taking intelligent gambles on strategic moves within context of a company requires the “courage calculation.” This involves establishing primary and secondary objectives, defining and outlining how crucial it is to achieve them, conducting risk/benefit analyses, gaining organizational buy-in, pinpointing a timeline to employ the action and creating backup plans in the event of failure.
This courage calculation is what separates premature or inaccurate moves with little to no impact from positive actions that lead to significant boosts. These actions, like management reshuffles and strategic reviews, naturally have more substantively positive impact at lower-performing companies because they are required. Reorganizations are effective because they have the ability to better align resources and human capital for top-performing companies – in essence, making a good thing better. But cost-reduction initiatives are universally effective at both high- and low-performing organizations. Another universal finding in the study is that industry is essential – regardless of what moves are better for stronger and weaker companies, the context of their respective marketplaces is important as well.
CEOs: The importance of the outsider’s perspective
The other significant factor in the study’s findings was that external hires are more likely to make bold moves, regardless of the health of their new companies. This was due to the fact that as an outsider, these CEOs are not influenced by the internal political culture or fear of actions of the previous tenure. As a result of this external perspective, these outsider CEOs outperformed internal hires with respect to annualized total returns to shareholders by an average of 2.2 percent, compared to 0.4 percent for internal CEOs, which represents an almost five to one split.
The report also outlined several important factors built around the importance of the outsider’s perspective, even for internal hires. Organizations need to cultivate an executive environment where a CEO has an outsider’s mindset and does not follow the crowd.
An MIT Sloan Management Review report found similar research based on the importance of adopting an outsider’s approach at the CEO level. Regardless of external or internal hire, executive boards need to enable CEOs to make bold moves without bureaucracy or the intrusion of legacies and insiders within an organization who could slow down decision-making. As new CEOs are more likely to make these moves, they need to encourage the boldness of an outsider that is required to change the direction of company performance.
Acting in contrast with the organization is also crucial. As mentioned earlier, new CEOs may make similar types and amounts of moves, but the context of their companies is more important. That factor may require a CEO to make a move that is in contrast to the current direction of the organization. Chad Hartnell, author of a recent study published in The Applied Journal of Psychology on the impact of CEO leadership and organizational culture on company performance, explained in a statement that this is why it is vital that CEOs act out of step with their organizations.
“Leaders who are culture conformists are thus ineffective,” Hartnell argued. “CEOs who lead in a manner different from the culture benefit companies, because they provide resources to the organization that the culture does not.”
New CEOs have the freedom to make daring moves, but they need to be well-considered. There is a balance between the health of an organization when a CEO takes over and the boldness of the actions taken.
About Caldwell Partners
Caldwell Partners is a leading international provider of executive search and has been for more than 45 years. As one of the world’s most trusted advisors in executive search, the firm has a sterling reputation built on successful searches for boards, chief and senior executives, and selected functional experts. With offices and partners across North America, Latin America, Europe and Asia Pacific, the firm takes pride in delivering an unmatched level of service and expertise to its clients.