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Three Reasons Outgoing CEOs Shouldn’t Pick Their Replacements

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Three Reasons Outgoing CEOs Shouldn’t Pick Their Replacements

Not every CEO can spot a winner. Here’s what a board should consider.
Tim Cook onstage
Apple CEO Tim Cook was hand-selected by his predecessor, Steve Jobs. But should the out-going CEO make that call? | Reuters/Robert Galbraith

Apple founder Steve Jobs groomed now-CEO Tim Cook for the job. Michael Dell hand selected Kevin Rollins for the top spot at Dell. And Carnival Cruise Lines CEO Micky Arison just handed the keys over to now-CEO Arnold Donald last year. But should a CEO be given full rein to select his or her replacement? Maybe not, says Stanford Graduate School of Business Professor David Larcker.

In one observation, almost 80% of handpicked CEOs underperformed the S&P 500 Index during their tenure.

In a recent thought piece, written with Stephen Miles (founder and CEO of the Miles Group) and researcher Brian Tayan, they examined 14 Fortune 250 companies with clearly identifiable handpicked successors between 2000 and 2011. (The researchers noted this area has had little academic research due to the difficulty identifying who is handpicked.) They found that almost 80% underperformed the S&P 500 Index during their tenure. Although not rigorously scientific, this observation provides some food for thought.

Here are three items a company board should consider before hiring the outgoing CEO’s pick:

1. CEOs don’t necessarily know how to pick a replacement.

Promoting a senior executive is very different from hiring the top gun. In fact, the researchers point out, some senior executives actually fail as CEO because they lack the leadership to succeed at the top. Therefore, previous CEO selection experience is crucial for the outgoing CEO.

2. CEOs are concerned with personal legacy.

Someone exiting the company might have an interest in preserving their strategy when maybe the best course of action is change. A slightly darker motivation: Some might actually want their successor to be less than a rousing success to make themselves look better or secure an invite back to save the company. Understanding a CEO’s motivation is key.

3. CEOs might pick someone just like them.

CEOs may focus on successors with similar qualities or people they groomed, which is not very useful if the company really needs a fresh perspective going forward.

Of course, CEOs can contribute positively to the process and often have valuable insights to share, so ignoring them also isn’t smart. What is: Boards should conduct a robust evaluation, and CEOs should be fully transparent and open-minded about the ultimate outcome.

Read the Closer Look online.

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