When a new CEO takes the helm, two lines of thought usually emerge about changes in the top management team. They either try to "clean up" by letting executives burdened by previous work at the company leave, or they are far-sighted and draw on the internal knowledge and expertise of existing employees to help them overcome the difficult period of getting to know a new role or a new company. Studies have shown that too many changes after the appointment of a new CEO can disrupt the company's operations.
Among other things, research has shown that succession usually causes a decline in performance, which may be exacerbated by "fighting factions" in management. This effect becomes more pronounced when a company is facing financial problems, for example: stressful working conditions are likely to strengthen an "us against them" mindset.
Existing managers are usually retained at the company due to their knowledge of established strategies and procedures, while newcomers have the task of contributing fresh perspectives and new ideas. The authors of the research found that the contrast between these groups can cause friction, which leads to a number of confrontations and very quickly has a negative effect on the company's performance in the critical period after the arrival of a new CEO.
But this break can also bring some benefits. According to the authors of the research, it may lead to a productive exchange of different opinions between groups. The conditions under which factions can be harmful or useful depend on several factors, including how the company is doing and whether the previous CEO was fired or resigned.
The researchers analysed a data set of 110 recent CEO successions at large publicly listed companies in four European countries: the Netherlands, Germany, Switzerland and the United Kingdom. These countries have different regulations governing a CEO's discretion to make managerial changes, which allows the results of the study to be generalised across countries and business contexts.
The authors collected data on CEOs and their lead teams from annual reports, corporate websites and media activities. They examined several variables that could affect the composition of the top team, including company size, industry volatility, CEO age, compensation and whether the new CEO was an outsider or an internal trustee. They also examined the overlap of terms of office between current managers and the previous CEO.
In order to measure the company's performance after succession, the authors calculated the change in return on assets from the year before the succession to the second year after. The results showed there are several ways to look at the effects of conflict between groups. According to the data, friction between groups turns into more productive ideas when succession occurs in relatively stable circumstances or when the new CEO was a direct successor to the one who left. In these cases, the company's performance practically changed, in some cases it even improved slightly.
If the incoming CEO was simply brought "from outside", then the company's performance dropped significantly. Moreover, if the company performed poorly during the period, strong breaklines led to a dramatic fall in results. Similar conclusions hold even if the original director had been dismissed.
The authors note that a change of CEO is generally a very disruptive factor for the company as a whole, and the companies in their sample have shown an overall decline in performance following the appointment of a new CEO.
The research further shows that CEOs need to have people around them to whom they can confer discretionary decision-making powers. In these circumstances, it is natural that the CEO would like to appoint subordinates who are loyal to them or in line with their strategic vision. However, the authors also warn that replacing long-term executives with "their own people" could turn significantly against the CEO. So they should be really careful about who is hired. If newcomers "fight" too much with existing members of management, it will soon have a significant impact on the performance of the entire company.
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