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Why Rookie CEOs Outperform

Experienced executives rely too much on old playbooks.

Is experience always better? Conventional wisdom suggests it is. When making a difficult decision, people tend to go with the “safe choice,” rather than a riskier option with a greater potential upside. In the boardroom, this tendency can translate into a preference for experienced CEOs in CEO selection. And, indeed, the share of S&P 500 CEOs with prior experience has grown from 4% to 16% since 1997.

The Jan-Feb 2021 issue of Harvard Business Review highlights findings from a Spencer Stuart study about the benefits and limits of potential and prior CEO experience. The study examined the performance of 855 S&P 500 CEOs appointed over a 20-year period, finding that CEOs with prior experience in the role underperformed first-time CEOs over the medium to long term. First-timers led their companies to higher market-adjusted total shareholder returns over the course of their tenure, with less volatility in the stock price. The study also provided advice to boards about how to select the CEO who is most likely to succeed given the opportunities and challenges the company faces.

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