Appointing a new CEO is one of the most crucial events in a company. So far, the literature on CEO succession has primarily concluded that people from the same company, with the same background and the same education will have similar worldviews and thus make the same decisions. Professional and demographic similarities between the resigning CEO and his successor would thus imply that new the CEO would continue along the existing strategic path of the company.
However, this rarely happens in real life. On the contrary.
In a new study, a Danish/German research team has explored the negative consequences of the similarities between CEOs and their successors. What does the crown prince actually do once the king is gone?
”It turns out that the more similar the new CEO is to the resigning CEO, the more he is likely to change the decisions of his predecessor and thus the strategic course of the company. This is in stark contrast with the common belief,” says Ingo Kleindienst, who is an associate professor at the Department of Management at Aarhus BSS. He is the co-author of the article ”Seeking distinctiveness through divestments: CEO succession and the effect of demographic similarity on the divestment of predecessor's investments”, which has been published in The Leadership Quarterly.
Kleindienst has conducted the study together with Thomas Hutzschenreuter and Claas Greger from WHU – Otte Beisham School of Management.
"CEOs like to think of themselves as rock stars or celebrities, and this is highly spurred on by the media. They like being in the public eye and being the centre of attention - and the bigger the company, the better"
Ingo Kleindienst - associate professor, Department of Management, Aarhus BSS
There are plenty of examples from the real world. One is the German airline Lufthansa. Here Wolfgang Mayrhuber, who took over as CEO from Jürgen Weber in 2003, shared a number of characteristics with his predecessor. They were both trained engineers and had completed a management degree at MIT. Both started their careers in Lufthansa’s technical department, both had devoted their entire career to the airline business - and both had worked at Lufthansa for more than 30 years. In addition, both were married with children and lived in Hamburg.
In line with the conclusion drawn from the literature on the subject, the media and the financial experts were fully expecting Mayrhuber to continue where his predecessor left off. Indeed, Mayrhuber was regarded as a close ally of Weber, so it seemed unlikely that he would change the company strategy.
However, after his appointment, Mayrhuber made a number of strategic choices that indicated a significant break from Weber. He ignored an unwritten rule of entering into strategic alliances and threw himself into acquisitions instead. He brought the focus back to Lufthansa’s core business; aviation. And he divested a number of investments made by his predecessor.
In this way, Mayrhuber acted in much the same way as a number of other CEOs in the study conducted by Kleindienst and his colleagues. In their study, they analysed 177 succession events - i.e. replacing the CEO - in 76 German companies between 1985 and 2007.
To establish the similarities between the resigning CEO and the new CEO, the researchers looked at previous experience, sector, nationality and age. Subsequently, they established the level of strategic change brought on by the change of CEO by exploring whether the new CEO - within the first two years of his tenure - had divested business units that his predecessor had invested in - this could be anything from the acquisition of companies to the purchase of new building sites.
The results show that the higher the similarity between the two CEOs, the more likely the new CEO will be to break with the company’s current strategic direction and make his own mark on the company.
For the sake of data reliability, all the companies in the study are listed in the HDAX segment of the German stock exchange. However, since the conclusions are founded on psychological mechanisms, the results also apply to Danish companies as there is no reason to believe that the psychological mechanisms would be any different in a Danish context.
According to Ingo Kleindienst, there are two overall reasons for the behaviour of CEOs: A general need for distinctiveness combined with a touch of rock star attitude that is unique to CEOs.
“So far, CEO decisions have been considered to be analytical and rational. However, by including psychological theories such as the theory of ‘optimal distinctiveness’, our study shows that emotions play an important role in the decisions made by the new CEO,” he says.
According to theory, everyone has a need to be like everyone else - just not too much. In other words, we all need to belong, but we also want to be distinct.
In addition, the CEOs themselves believe that they are special. They have won many battles in the elimination race towards becoming CEO, they make decisions that have far-reaching consequences, they have the power to do what they want, and thus they see themselves as being more special than others are. This means that compared to other people, they have an even greater need to be distinct/stand out.
“CEOs like to think of themselves as rock stars or celebrities, and this is highly spurred on by the media. They like being in the public eye and being the centre of attention - and the bigger the company, the better. The reason why the company’s strategy changes when the new CEO is similar to his predecessor is largely found in the emotions that arise. If the new CEO feels that his distinctiveness is threatened, he will make use of various coping strategies, such as divesting business units, in order to prove that he has stepped out of his predecessor’s shadow and is capable of standing on his own two feet. This psychological need is present in all of us, but even more so in CEOs,” says Kleindienst and sums up:
“The CEO successor thus deliberately reverses his predecessor’s decisions in order to differentiate himself. And in this connection it’s a strategically clever move to divest business units in order to restore one’s distinctiveness rather than make new investments. It’s impossible to know what would have happened if the divestment had not taken place, whereas it’s easy to see whether an investment was good or bad.”
Although the study does not reveal anything about the financial consequences of the actions of the CEOs, it points towards several consequences that the choice of successor will have on the corporate governance of the company.
If the board is happy with the company’s strategic course, but has to appoint a new CEO as the incumbent CEO has resigned, is too old or dies, the literature in the field claims that the board should look for a CEO who resembles the resigning CEO. However, according to this study, this might not be the best course of action. In fact, the need for distinctiveness, which is particularly prominent in CEOs, suggests that the board would benefit from appointing someone who differs slightly from his predecessor.
“Those in a position to appoint new CEOs need to be aware that it’s not just about finding a profile that fits, but about finding the relative profile. If the new CEO is too similar to his predecessor, he is very likely to change the strategic course of the company either by divesting or in other ways. Thus, the two CEOs need to be sufficiently different to prevent the new CEO from feeling that his identity is threatened. The differences should allow him to feel special enough to think: You cannot compare me to my predecessor, so I’m under no pressure to prove that I can do this on my own and that I didn’t just get the job because of the king. Only in this situation, will the new CEO settle for making only minor changes to the strategy,” says Kleindienst and emphasises:
“This is particularly true for family-owned companies where the succession process might become highly complicated as the succeeding son or daughter will be even more eager to step out of their parent’s shadow to prevent people from saying that they were handed the job on a silver platter. This can put enormous pressure on the succeeding son or daughter, and it might result in significant strategic changes.”
If you want the company to continue along its current course, you need to appoint a successor who is slightly different from the predecessor. In this connection, it is interesting that the same research team has previously explored how the resigning CEOs use informal power to influence the decision about who will replace them. This study shows that the resigning CEO wants to be succeeded by someone who is as similar to him as possible. Indeed, it is crucial for the resigning CEO that his replacement will continue where he left off. Only in this way, is he able to preserve his legacy and leave the world with the impression that his strategy was the right one. However, this is evidently in sharp contrast with the new study.
CEO succession is thus a process in which the perspective changes somewhere along the way; to the resigning CEO, similarity presents a solution, but to the new man in charge, it presents a problem.