Managers in crisis: the advantage of inexperience

There is a natural trade-off in the selection process of top managers (CEOs). On the one hand, insiders have accumulated more experience in the company. On the other hand, outsiders may be able to innovate in responding to new challenges, exploring new opportunities. Companies are interested in making the best choice between different candidates, but the circumstances themselves require managers with different profiles. In the 2018 article, "CEO Performance in Severe Crises: The Role of Newcomers", with Sharmin Sazedj and João Amador, we analysed the impact on firm performance of newcomer CEOs - recent hires, coming from other firms. Our focus was on the period of the sovereign debt crisis, where firms experienced a simultaneous and unexpected negative shock, with no possibility to immediately optimise their recent CEO choices.

Figure: Tenure and Performance, Before and During the Crisis

The figure above presents the results graphically. The Crisis variable shows that the crisis led to a fall in sales and product added in most Portuguese companies. For the period before the sovereign debt crisis, the Newcomer variable points to a performance gap indistinguishable from 0 between firms managed by newcomers and the rest. In contrast, the Crisis*Newcomer variable, which captures the differential in the crisis period, reveals that the performance of firms managed by newcomer CEOs is superior, both in terms of sales and firms' value added.

In other words, in the pre-crisis period, the impact on the management of a newcomer CEO or another is statistically indistinguishable, if we consider the remaining observable characteristics of the manager and the company. However, once the sovereign debt crisis hits, the differences become significant, with newly arrived CEOs being associated with significantly better performance, by about 18 per cent. This outperformance suggests that accumulated experience at the firm is less important in times of crisis than a newcomer CEO's flexibility and willingness to take risks.

On the other hand, and perhaps more importantly, we were also able to ascertain which decisions were behind the better performance of the newly arrived managers:

- higher levels of investment;

- easier access to short and, especially, long-term financing;

- hiring more workers;

- higher salaries;

- greater openness to international trade.

In short, a longer period of experience in the same company does not translate into better results in the face of a general crisis of unprecedented dimensions. In this case, inexperience may be the other name for boldness and creativity.

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The original article, "CEO Performance in Severe Crises: The Role of Newcomers", by Sharmin Sazedj, João Amador and José Tavares, is available on the website of the Centre for Economic Policy Research (CEPR) and the Banco de Portugal. A summary of the article is available on CEPR's research blog Vox.