Hiring a CEO from outside is a common practice, with around a third of new hires coming from outside the hiring firm.  Such hires are often made in the hope that the new boss will implement meaningful change and chart a new course for an organization that is seemingly going in the wrong direction.

Such hires are somewhat hit and miss, however, with performance data showing that they typically perform worse than internal hires.  Research from the University of Zurich suggests that a major reason for this could be a misalignment between the firm and the new hire.

The researchers analyzed 1,275 CEO appointments between 2001 and 2014, and found that neither the length nor breadth of the new CEOs’ experience had any bearing on the performance in their new firm.  Instead, the key appears to be the fit between the new hire and their new employer in terms of the size, industry focus, and stage in their life-cycle.

When such an alignment doesn’t exist, the performance of the company after their appointment tends to decline as it becomes difficult for the CEO to truly grasp the problems the organization faces.  This then results in them pursuing unsuitable courses of action that may have worked in previous roles but are not applicable in their current one.

Lonely at the top

The analysis found that underperformance was often attributable to the negative sentiment that can be linked to any socio-cognitive bias in terms of employees, partners, board members, and even analysts, and the media.

The findings emerged after the researchers analyzed employee ratings, analyst reports, press items, and executive stock selling around the time of the appointment of the new CEO.  The analysis suggests that these key stakeholders are heavily scrutinizing the new boss and may withdraw their support to them.

Inside CEOs can take advantage of their social embeddedness and general familiarity with how the organization operates to manage some of these negative sentiments, but this is not an option for external hires.

That’s not to say that external hires are destined to fail, but for them to succeed, it’s vital that their background fits the unique characteristics of the firm.  It’s also important that the hiring board do their best to manage any potentially negative sentiment from stakeholders, which is not typically something that most onboarding procedures do today.