Friday, June 08, 2012

What Happens When The Former CEO Sticks Around?

Professors Tim Quigley (Lehigh) and Don Hambrick (Penn St.) have published a new study in Strategic Management Journal on the impact when a former CEO stays on as chair of the Board of Directors.  Their results prove quite interesting.  Quigley and Hambrick examined 181 successions in high technology firms.  What did they find?  When a predecessor sticks around as board chair, the firm tends to experience less strategic change.  Resources don't get re-allocated as much to new initiatives or sectors, divestitures are less likely to occur, and executive team members are not replaced as often.   The scholars also found that company financial performance doesn't change much.  As they wrote, "New CEOs who are restricted in their actions are correspondingly restricted in the degree to which they can alter performance."  When the predecessor finally does step down as chair of the board, then strategic and personnel changes begin to occur.  Moreover, performance begins to deviate from the earlier levels. 

Many people advocate separating the chair and the CEO roles in corporations.  These results suggest that we have to think carefully about who occupies those roles.  If the chair position is held by the current CEO's predecessor, we may have a chair who does more than monitor and control the CEO's actions.  That chair may actually restrict the CEO's actions so as to preserve the strategy, structure, and executive team that already had been in place prior to the succession.  In these cases, the governance process may actually inhibit very necessary strategic change at times.

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