Hiring boards' lack of knowledge about executive position candidates could be leading to an increasing number of CEOs leaving their jobs earlier than expected, according to a study released June 3 by Yan Zhang at Rice University's Jones Graduate School of Management. Of the 204 company leaders Zhang studied from 1993 to 1998, 55 (27%) left their job within three years.
In many cases, the hiring firm's board of directors doesn't know enough about the candidate's true competencies, leading to a faulty hire and dismissal of the CEO shortly after succession, reports Zhang in "Information Asymmetry and the Dismissal of Newly Appointed CEOs: An Empirical Investigation."
The study suggests hiring boards may want to look more closely at internal candidates because they typically already hold executive-level positions, such as chief financial officer, chief operating officer and vice president.
"They would have had numerous opportunities to interact with the board members," Zhang said. "The board has a great opportunity to know inside candidates, thus reducing information asymmetry between the board and inside candidates."
Meanwhile, the board is less likely to know outside candidates and more likely to make a poor hiring decision in outside successions.
Companies that have mandatory retirement ages also can improve hiring success rates by implementing a succession plan. This allows the company to groom an heir apparent before the CEO leaves, Zhang says.
Zhang also points to the board's nominating committee as an influence on early CEO dismissals. Independent committees tend to fare better than those with internal directors because the latter may perceive themselves as contenders for the position.
"They're not going to bring objective evaluations to the CEO selection process," Zhang says. "However, if a company has outside directors on the board and those outside directors are too busy -- having too many other directorships -- then the nominating committee is not as effective."
