Finding the Right CEO
The best stepping-stone to the corner office is changing. The vast majority of new CEOs still come from within: For example, in 2020, 77% of new S&P 500 CEOs were internal promotions. But whereas 20 years ago chief operating officers were the overwhelming favorites, accounting for 76% of such appointments, they have lost significant ground and look to be overtaken soon by another group of aspirants: division heads. According to a new study, however, neither cohort is the most likely to deliver outstanding results. “Leapfrog CEOs”—leaders appointed from one level below C-suite officers or division heads, with titles such as senior vice president and general manager—have the best odds of steering their firms into the top quartile of performers.
A New Focus on Complexity and Opportunity
As part of a large ongoing study of CEOs, researchers from the executive recruiting and leadership advisory firm Spencer Stuart analyzed every CEO succession in the S&P 500 since 2000. The waning numbers of COOs tapped for the top job reflect changing strategic priorities, they say. “The role of COO was popularized in the 1990s as a result of management trends around quality—kaizen, total quality management, Six Sigma, and so on, when the leadership emphasis was on operations,” explains Claudius Hildebrand, the head of CEO data and analytics at Spencer Stuart and a coauthor of the study. But in recent years companies have become flatter, and power has moved from functions to business units. What’s more, boards have come to prioritize experience running a full P&L. “Divisional leadership positions combine the benefits of managing complexity with the experience of spotting opportunity and market trends,” Hildebrand says.
In 2020—the last full year for which data is available—chief operating officers accounted for 38% of new CEOs in the S&P 500. Division heads were only two percentage points behind them, at 36%. Chief financial officers were next, at 9%. CFOs appeal to boards that want to ensure continuity, because they often serve as right hand to the CEO. Leapfrog candidates—the final group with significant representation in the study—accounted for roughly 5% of new chief executives.
Having identified where successors came from, the study looked at company performance after they assumed the CEO role. The researchers sorted the executives into quartiles based on their company’s market-adjusted total shareholder returns. The least-common choice, the leapfrogs, had the highest share of CEOs in the top quartile for performance: 41%. Former division heads and COOs were next, at 27% and 25%, while the share of CFOs in the top quartile of performers was only 8%. Leapfrogs were also less likely than CFOs—ostensibly a safer pick—to end up in the bottom quartile, despite their lack of C-suite experience. The patterns were consistent after controlling for industry differences as well as organizational and market attributes and for pre-Covid performance.
Read More at https://hbr.org/amp/2022/01/finding-the-right-ceo