3 Lessons Of Exceptional CEOs

Not all CEOs can be exceptional. Yet emerging research on the highest-performing CEOs yields lessons to guide every executive, especially those stewarding companies in transition. In a study of CEOs published in McKinsey Quarterly, researchers Michael Birshan, Thomas Meakin, and Kurt Strovink (all McKinsey partners) surveyed the early initiatives of CEOs with the most outstanding track records. Three key lessons emerged from scrutiny of these elite CEOs.

Lesson 1. CEOs hired externally perform better. The highest performing CEOs tend to be hired from outside the organization. The research shows that exceptional CEOs are twice as likely to have been hired from outside the enterprise as the average CEO in the data set and roughly 1.5 times as likely to be been external hires as the other top-quintile CEOs. Adopting an outsider’s perspective tends to yield unbiased insights needed for executing breakthrough moves.

The researchers speculate that CEOs recruited from the outside are more questioning, act more aggressively, and make more changes than their counterparts from the inside. An outsider’s point of view can be harnessed to challenge the status quo with greater objectivity and overcome the organizational inertia that sometimes limits an insider’s span of action.

Lesson 2. CEOs with exceptional track records are more likely to conduct a strategic review earlier. The study offered insights on how top-performing CEOs have a clear-eyed bias for action. Investing in a robust strategic review often provides a candid perspective for setting a strategic direction. Exceptional CEOs who led struggling companies were about 60 percent more likely to conduct a strategic review in their first two years on the job versus the average CEO in the sample. CEOs joining low-performing companies derived the biggest benefits from conducting a strategic review.

“An outsider’s point of view can be harnessed to challenge the status quo with greater objectivity and overcome the organizational inertia that sometimes limits an insider’s span of action.”

Exceptional CEOs surpassed the average in the average number of strategic moves they made in their first year. Changing strategic direction typically requires freeing up resources, often in part by cutting costs in lower-priority parts of the company. While cost-reduction programs are a no-regrets move for all CEOs, the exceptional CEOs were significantly more likely to launch such initiatives than the average CEO, thereby building strategic momentum.

Lesson 3. Beware organizational balance and management reshuffles. Conventional wisdom suggests that new CEOs taking charge of lower-performing companies should consider management reshuffles and organizational redesign. This study of CEOs, however, showed that the average CEO was less likely to undertake organizational redesign or management-team changes in the first two years in office. This result, the researchers suggest, could be a function of the strategic game the CEOs were playing: they may have inherited high-performing companies (which can be hurt by reshuffles) or prioritizing change management, given that there are only so many changes organizations can absorb in a given period.

The McKinsey partners’ hypothesis is that since the group of exceptional CEOs included an above-average proportion of outsider CEOs launching fundamental strategic rethinks, the data may reflect a sequencing of initiatives, with structural change following strategic shifts.

Research Methodology
The researcher’s conclusions were based on a study of 600 CEOs at S&P companies between 2004 and 2014. The focus was on the top 5 percent of the CEOs in the dataset. These CEOs led companies whose shareholder returns had increased by more than 500 percent over the CEO’s tenure. The study compared this elite group with the full sample as well as with a subset of CEOs whose companies achieved top-quintile performance during their tenure as compared with their peers.

Some of the CEOs studied faced crises. Some were guiding a company through bankruptcy proceedings and then returning it successfully to the public markets. Others were able to deliver the highest returns through strategic repositioning and operational discipline within more normal industry and economic conditions. Overall, the exceptional CEOs were neither more nor less likely to be found in particular industries, to lead companies whose size differed from the mix in the broader S&P 500, or to join particularly high- or low-performing companies.