Sunday, June 27, 2004

BAH study: Insider CEO's perform better

A recent comprehensive study of the worlds 2.500 largests companies by Booz Allen Hamilton (S+B, June 2004) shows that outsider CEO's deliver significantly lower shareholder returns than insider CEO's do over the course of their tenure. "The best-performing leaders already have experience at the company they are leading. Prior service and experience as a chief executive does not correlate with superior performance. To the contrary, over the six years of our study, CEOs who had previously led other companies delivered returns for investors 3.7 percentage points per year lower than first-time insiders".
As reasons for Insider CEO's being more succesfull are given:
1. Outsiders often have a mandate from the board to oversee a major, needed change, but frequently lack the personal networks, cultural understanding, and deep knowledge of the multiple operating environments — in sum, the “social capital” — to sustain change and high performance at a firm throughout their tenures.
2. Outsiders typically are brought in to execute a specific playbook — to solve this problem now in this way. But in BAH's experience, the most successful CEOs are those who can adapt and modify the playbook, their own leadership styles, or both; they create new directions as needed.
Do you agree with the reasons that BAH provides, or do you believe there are other (additional) reasons behind this important finding?