CEO Succession Origin and Firm Performance: A Multilevel Study

• Published date: 01 January 2017
• Author: Dimitrios Georgakakis,Winfried Ruigrok
• DOI: http://doi.org/10.1111/joms.12194
• Date: 01 January 2017

CEO Succession Origin and Firm Performance:

A Multilevel Study

Dimitrios Georgakakis and Winfried Ruigrok

University of St. Gallen

ABSTRACT There has been much controversy concerning the relationship between outside

CEO succession origin and firm performance. Some scholars take the organizational-adaptation

view to highlight the benefits of outside succession; yet others adopt the organizational-disruption

view to pose the selection of an outsider CEO as a disruptive and disadvantageous event for

organizations. In this study, we develop an integrated multilevel framework that reconciles

these opposing perspectives and examines the conditions under which the benefits of outside

CEO succession outweigh the costs. Data from 109 CEO succession events in large

international firms show that the performance advantages of outside succession materialize

when the new CEO: (a) socio-demographically resembles incumbent executives, (b) possesses a

variety of experience, and (c) is hired by a well-performing firm operating in a munificent

industry. Overall, our research demonstrates that the performance implications of new CEO

origin should not be considered in isolation, but in interaction with multilevel characteristics.

Keywords: CEO succession, firm performance, top management teams, multilevel, strategic

leadership

INTRODUCTION

Appointing a chief executive officer (CEO) from outside the firm has become a frequent

phenomenon in recent years. Empirical evidence shows that the rate of outside CEO

succession among the world’s largest international organizations rose from 14 per cent

in 2007 to 29 per cent in 2012 (Favaro et al., 2013). This rising tendency of hiring

CEOs from the external labour market is partially driven by the increasing information

processing and external knowledge demands facing large international corporations

(Hermann and Datta, 2002; Magnusson and Boggs, 2006; Menon and Pfeffer, 2003).

Yet, while outside CEO succession becomes widespread, extant research shows its rela-

tionship with post-succession firm performance to vary from positive to negative (for a

Address for reprints: Dimitrios Georgakakis, University of St. Gallen, Research Institute for International

Management, Dufourstrasse 40a, CH-9000 St. Gallen, Switzerland (dimitrios.georgakakis@unisg.ch).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:1 January 2017

doi: 10.1111/joms.12194

review: Karaevli, 2007). Such inconsistency among prior studies suggests a need to

investigate the conditions under which firms can reap benefits from the selection of an

outsider CEO (Finkelstein et al., 2009). Assessing the relationship between outside CEO

succession and firm performance without considering the individual-, organizational-,

and environmental-level factors surrounding succession is unlikely to fully capture the

complex nature of this relationship.

In the extant literature, two opposing theoretical streams have nurtured a longstand-

ing debate over whether, or not, appointing an outsider CEO is the right choice for

organizations. On the one hand, the organizational adaptation view poses outside CEO suc-

cession as a beneficial aspect (Helmich and Brown, 1972). It implies that CEOs

appointed from the external labour market possess more external knowledge and infor-

mation compared to those hired from the firm’s internal ranks, and thus, are better

equipped to expand the resource base of the firm and promote innovation, learning,

and high performance (Menon and Pfeffer, 2003; Wiersema, 1992). In direct contrast,

another volume of research adopts the organizational disruption view of succession, and sees

the selection of an outsider CEO as a disruptive event related to costs for the firm

(Vancil, 1987). It advocates that outsiders lack firm familiarity which – in combination

with the difficulty of integrating in the incumbent top management team (TMT) and

organization (Friedman and Saul, 1991) – causes disruption to internal processes and

results in low performance (Zhang and Rajagopalan, 2004). Due to this theoretical inde-

terminacy among prior studies, scholars have called for research that goes beyond

unitary-based assumptions of the effects of new CEO origin per se (Finkelstein et al.,

2009), and ‘moves forward with contingency explanations’ of when (under which condi-

tions) the benefits of outside succession are more likely to occur (Giambatista et al.,

2005, p. 982).

To resolve the current debate on the performance implications of new CEO origin,

we explore both the organizational adaptation and disruption views of succession. Although

these theoretical views lead to opposing predictions, an important goal of this study is to

integrate these perspectives and examine the boundary conditions under which the ben-

efits of outside succession posed by the organizational adaptation view outweigh the

organizational disruption costs. In doing so, we propose and test a multilevel contin-

gency framework suggesting that outside CEO succession is neither ultimately benefi-

cial, nor ultimately detrimental to firm performance – but its effects depend on factors

nested at different layers of context.

Central to our framework is the notion of executive job demands and its multilevel

implications (Hambrick et al., 2005). This notion suggests that the challenges facing

CEOs in their jobs vary, and the degree to which these challenges can be overcome is

contingent upon the individual-level compatibility between the CEO’s characteristics

and job requirements, as well as the organizational- and environmental-level impera-

tives facing the firm (Nadkarni and Chen, 2014). Building on this conception, we theo-

rize that the underlying disadvantages posed by the organizational disruption view can be

better described as the lack of firm familiarity and integration job challenges that out-

sider CEOs face compared to internal hires and should overcome early after their entry

in the firm (Chen, 2015). At the same time, the informational benefits stressed by the

organizational adaptation view can be seen in relation to the ‘going-in-mandate’ of outside

59CEO Succession Origin and Firm Performance

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies