Why do some outside successions fare better than others? The role of outside CEOs' prior experience with board diversity

• Published date: 01 December 2016
• DOI: http://doi.org/10.1002/smj.2471
• Author: David H. Zhu,Wei Shen
• Date: 01 December 2016

Strategic Management Journal

Strat. Mgmt. J.,37: 2695–2708 (2016)

Published online EarlyView 18 January 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2471

Received 29 May 2014;Final revision received16 September 2015

WHY DO SOME OUTSIDE SUCCESSIONS FARE

BETTER THAN OTHERS? THE ROLE OF OUTSIDE

CEOS’ PRIOR EXPERIENCE WITH BOARD DIVERSITY

DAVID H. ZHU*and WEI SHEN

Department of Management, W. P. Carey School of Business, Arizona State

University, Tempe, Arizona, U.S.A.

Research summary: We develop a theory to explain why new outside CEOs can better manage

their relationship with the board if they previously served on boards that were morediverse than

the focal board. We predict that a new outside CEO’s prior experience with more diverse boards

not only reduces the likelihood of post-succession CEO turnover and director turnover, but also

improves rm performance. Results froman analysis of 188 outside CEOs in a sample of Fortune

500 companies provide support for our theory. This study contributes to upper echelon theory

and research by identifying outside CEOs’ prior experience with board diversity as an important

aspect of their background that inuences a range of major organizational outcomes, including

CEO turnover,director turnover, and rm performance.

Managerial summary: It is challenging to be a new CEO who comes from outside of the

organization. Our study examines why some newoutside CEOs fare better than others. We suggest

that a positive relationship with the board of directors is a key factor in a new outside CEO’s

success. A new outside CEO can better manage the relationship with the board if he or she has

prior experience working with other demographically diverse boards. In contrast,when the focal

board is more diverse than the other boards on which the new CEO previously served, the new

CEO tends to struggle in managing his or her relationship with the board, experiencing a higher

likelihood of turnover and delivering worse nancial performance. Copyright © 2015 John Wiley

& Sons, Ltd.

INTRODUCTION

CEOs face unprecedented challenges in meeting

the expectations of boards and shareholders. The

frequency of CEO turnover has increased signi-

cantly in recent years (Chen and Hambrick, 2012;

Wowak, Hambrick, and Henderson, 2011; Zhang,

2008), and the average CEO tenure has been sub-

stantially reduced (Favaro, Karlsson, and Neilson,

2011). New CEOs in particular are increasingly

pressured by corporate governance reforms and

Keywords: CEO succession; board of directors; board

diversity; executive turnover; organizational change

*Correspondence to: David H. Zhu, P.O. Box 874006, W. P.

Carey School of Business, Arizona State University, Tempe, AZ

85287-4006. E-mail: david.zhu@asu.edu

Copyright © 2015 John Wiley & Sons, Ltd.

shareholder activism to deliver desirable perfor-

mance outcomes shortly after they assume the ofce

(Wiersema, 2002). About one third of new CEOs

are appointed from outside the rm (Chen and

Hambrick, 2012; Zhang and Rajagopalan, 2010),

and research suggests that these outside CEOs face

even greater challenges than inside CEOs: They

have to acquire rm-specic knowledge quickly,

establish their leadership role effectively, and

initiate and implement major changes to improve

nancial performance (Harris and Helfat, 1997;

Parrino, 1997; Zhang and Rajagopalan, 2010).

While research on CEO succession has long

emphasized that the outside status of a new CEO

has substantial impacts on post-succession per-

formance outcomes, this literature has largely

focused on comparing outside CEOs with inside