During the sovereign debt crisis, the performance of Portuguese companies has demonstrated that newly hired managers were able to achieve better financial results. When compared with top management that joined the company beforehand, newly hired managers perform 18 per cent better, on average, when it comes to both total sales and value-added.
Article by José Tavares | Reading time 2 minutes
There is a natural trade-off in the selection process of top management (CEOs). On the one hand, the insiders gathered more know-how about the company. On the other hand, the outsiders are more likely to innovate when addressing new challenges by exploring opportunities. With that said, organizations are interested in making the best choice among different candidates. However, different circumstances demand different profiles. In the article from 2018, “CEO Performance in Severe Crises: The Role of Newcomers”, with Sharmin Sazedj and João Amador, the impact of newly hired CEOs on performance was examined. The analysis focused on the period of the sovereign debt crisis, during which companies suffered simultaneously and unexpectedly a negative chock, while not having the possibility of immediately rethink their CEO choices.
Figure: Tenure and Performance, Before and During the Crisis
The above figure displays the results in a graph. As depicted above, the variable Crisis shows how this period led to a drop in sales and gross value added for most Portuguese companies. In the period preceding the crisis, the Newcomer variable shows a performance differential of 0 between companies managed by recently hired CEOs and the others. However, the variable Crisis*Newcomer, which captures the differential during the crisis, shows that the performance of organizations run by newcomers is better both in total sales and value-added.
In other words, before the crisis, the impact in management between a newly hired CEO and the others is statistically indistinguishable, when considering observable characteristics of the manager and the company. Nonetheless, when the crisis settles, the differences in performance are statistically significant: newcomers perform 18% better on average. The differential in performance suggests that accumulated know-how about the organization is less important during a crisis than flexibility and willingness to take risks, which are usually associated with new hires.
Moreover, the study was able to verify which decisions positively impacted the performance of newcomers:
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higher investment levels;
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easier access to short and, specially, long-term financing;
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recruitment;
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higher wages;
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openness to international trade.
In a nutshell, knowing more about a company from an insider perspective does not translate in better results when a worldwide crisis with untold dimensions settles in. In that case, inexperience becomes another word for audacity and creativity.
The original article, “CEO Performance in Severe Crises: The Role of Newcomers” by Sharmin Sazedj, João Amador and José Tavares, is available in the website of the Centre for Economic Policy Research (CEPR) and Banco de Portugal. A shorter version can be found on the Vox Blog, from CEPR.
