By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
In 2015, when Rolls Royce appointed Warren East as chief executive, it highlighted his "proven strategic and leadership skills in a global business and a strong record of value creation.”
East had enjoyed a 12-year tenure as chief executive of chipmaker Arm, during which time it became the UK's largest tech company by market value. It was valued at £12.3bn around the time of his departure.
Things were different at Rolls Royce, however. He inherited some costly challenges (including corruption allegations and problems with its flagship engine) and had to lead the company through the pandemic. The value of Rolls Royce collapsed more than 40 per cent between 2014, when East joined the board, and last year.
Demand for experienced chief executives has been steadily increasing over recent decades. Between 1997 and 2022, the share of S&P 500 chief executives with prior experience quadrupled from 4 per cent to 19 per cent, according to executive search firm Spencer Stuart.
But recent research suggests that chief executives can struggle to repeat their past successes. Another recent report by Spencer Stuart examined the performance of 855 S&P 500 chief executives over two decades. It found that first-time leaders produced higher market-adjusted total shareholder returns and, on average, led “three years longer and with less volatility in performance”.
Furthermore, of the bosses whose initial and subsequent leadership roles were both in S&P 500 companies, 70 per cent performed better in their first job.
Times of uncertainty may lead boards to turn to candidates with a successful track record. Indeed, a battle-tested chief executive is more likely to have a wider network and can move quickly, Spencer Stuart found.
“In highly ambiguous environments, like Covid presented us with, it’s a fundamental psychological bias. We revert back to known people with prior experience,” said Claudius Hildebrand, the head of Spencer Stuart’s chief executive data and analytics team, and a member of its chief executive practice and leadership advisory services division. Hildebrand co-authored the recent report.
But that might put companies at a disadvantage. “As counterintuitive as it sounds, a CEO who has done it before runs the risk of misreading a situation and applying playbooks that may have worked in the past but may not be fully suited to the current situation,” says Hildebrand.
Appointing chief executives with prior experience could also reinforce a lack of diversity among leaders.
Overall, S&P 1500 companies have made progress in diversifying their leadership ranks. Women comprised 17 per cent of new leaders at large companies in the first quarter of this year, up from 13 per cent last year and up from 5 per cent in 2015, according to data from Spencer Stuart.
One of the reasons for the moderate pace of inclusion of women in the leadership ranks may be that companies sought out those with prior leadership experience following the Covid-19 pandemic. This would exclude underrepresented groups who have historically held fewer leadership positions.
This article is based on a story written for Agenda by Neanda Salvaterra.
