The greater the similarity of newly appointed CEOs to their predecessors, the more likely they are to change the company’s strategy. This result - contrary to prevailing opinion in the field - was demonstrated in a study by a team of researchers from Germany and Denmark. They believe that this behavior results from the need of new managers to be distinctive. The effect is even more pronounced when the previous CEO remains with the firm in the supervisory board.
It is the big question after every change at the top in large corporations: How far will the new CEO deviate from the strategic course set by the previous one? Management science previously assumed that managers with a similar professional and demographic background also tended to be similar in their actions. However, Prof. Thomas Hutzschenreuter at the Chair of Strategic and International Management at the Technical University of Munich (TUM) frequently noticed cases that contradicted the prevailing theory.
He therefore worked with colleagues to analyze about 180 succession events at the top of about 80 German companies from 1985 to 2007. They were listed on the DAX, MDAX or TecDAX exchanges. To determine the similarity between the old and new managers, the researchers looked at their past functions and industries, nationality and ages. To measure the extent of a strategic change, the study investigated whether the new CEOs sold business units during the first two years of their tenure, which had been acquired by their predecessors.
"Important insights for succession plans"
The results are clear: The greater the similarity between the old and new CEOs, the more likely it is that the new managers will change the company’s strategy. "Top executives are inevitably compared with those who were previously in charge," says Hutzschenreuter. "Because nobody in that position wants to be considered interchangeable, they feel a need to make themselves distinctive through their actions. This urge is stronger when there are no biographical features that might set them apart."
This need for distinctiveness even becomes greater if the predecessor stays on as a member of the supervisory board. By contrast, the change in strategy is less pronounced in cases where the predecessor is forced out. "These findings can be an important basis for future succession decisions in listed companies," says Hutzschenreuter.
The psychological affect revealed in the study has not been considered in previous research on executive succession scenarios. Other studies could look into whether these behavior patterns occur in other countries and other types of companies, says Hutzschenreuter: "People taking charge of family businesses might feel highly motivated to show that they are not going to follow in their father’s or mother’s footsteps."
Hutzschenreuter T, Kleindienst I, Greger C. Seeking distinctiveness through divestments: CEO succession and the effect of demographic similarity on the divestment of predecessor’s investments. Manage Decis Econ. 2018. DOI: 10.1002/mde.2918