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As it’s repeatedly been proven, the success of a company is dependent on the strategies implemented by its CEO. New research by University of Missouri has revealed that recruiting chief executives from outside a company can be beneficial to businesses who are in difficulty. The study was conducted across six decades, from 1951 until 2010, whereby researchers looked at the financial decisions made by newly-appointed CEOs of 2524 companies.
Since appointing a CEO from outside the company can have an element of unpredictability, on average 78% of CEOs are hired internally. However the research revealed that hiring an external candidate as new chief executive could be the key to helping a struggling business.
Compared to those appointed from within the company, chief executives who have been recruited from outside tend to deploy a different strategy, by focusing on research and development. According to Stephen Ferris, one of the professors who conducted the study, this signaled a desire to carry the company forward through innovation. Internal hires on the other hand often make large acquisitions as part of the process of nurturing and developing a stable business.
Ferris explained, “If a company currently is either mired in mediocrity or performing poorly and it announces the hiring of an external CEO, it could be a signal that the board is serious about fixing problems.” Hiring an external CEO can consequently be good way to give a struggling company a new lease of life.
The results of the study “Six Decades of CEO Successions: The Importance of Being an Insider,” are to be published in an upcoming issue of the Journal of Accounting and Finance.