Experience: Threat or Menace?

Good judgment comes from experience, and a lot of that comes from bad judgment. — Will Rogers

What will you experience in this essay? I don’t know. Different people read the same words and see different stories. Which, actually, is what this essay is about. Which story should we believe?

Experience, CEOs, and profits

We watch Hollywood CEOs dispense orders while they march down endless hallways with the top three levels of their organization charts trailing in strict hierarchical order. All hail the CEOs and bend to their wills. Within minutes bottom lines surge and fortunes are made.

Or we watch real-life CEOs being shamed, blamed, and flamed. Off with their golden parachutes! Help wanted: new blood. Who wants to go next?

A sensible question, and not so easy to answer. Who should go next? An insider who knows the business or an outsider with a fresh perspective? A young hotshot or a seasoned veteran? Are real-life CEOs destined for front-page failure?

Professors Monika Hamori of IE Business School in Madrid and Burak Koyuncu of Rouen Business School in Rouen, France looked into such questions. The Wall Street Journal wrote about their research on October 3, 2010, in “CEO Redux Not Always a Hit.”

Of course, pretty much nothing is always a hit. For that matter, pretty much nothing is always a miss. That headline is as informative as “coin doesn’t always turn up heads.” But you and I assembled here to quibble over conclusions, not headlines. The conclusions over which we will quibble are those reported by the WSJ, since I was unable to find the original research paper with the professors’ conclusions.

CEOs gone bad, it seems

Here are the first two sentences from the article:

“For chief executives, past experience doesn’t necessarily lead to future success.

“A new study found that CEOs who have previously held other CEO posts actually perform worse than people who have never been CEO, judging by a key metric.”

What message do you get from those lines and from the “CEO Redux Not Always A Hit” headline? Probably that experience is overrated. Such a conclusion would be newsworthy indeed, which is presumably why it turned up in the news.

The article went on to cite supporting data: CEOs with prior experience as CEOs averaged 3.92% (such precision!) return on assets (ROA) over three years, and first-time CEOs averaged 5.4% ROA. Repeat CEOs who stayed in the same industry averaged 3.1%. Repeat CEOs who stayed with similar-sized companies averaged 2.94%.

It doesn’t sound good for experience. No one wants to give up a point or two of ROA, not even a CEO. Still, we’re not ready yet to reach for conclusions, let alone accept the implication that a company should not hire as CEO anyone who has previously been a CEO.

Introductory quibble: Does it matter?

The WSJ article does not say whether the differences in ROA are statistically significant. Even if they are, we can quibble whether the differences are managerially meaningful. Considering the tremendous variation in ROA among companies, the difference between 3.92% (or even 2.94%) and 5.4% is not very big. That narrow range would suggest that, as effects go, CEO experience is minor.

More important, three-year average ROA is a dubious metric for answering the experience question. For a better metric, see the next quibble.

Important quibble: Who’s getting better?

We don’t know from the WSJ article whether there were differences in ROA in companies before they got the first-time or repeat CEOs. Perhaps the 3.92% average ROA for repeat CEOs was an improvement from a lower number. Perhaps the 5.4% ROA for first-time CEOs was a reduction from a higher number. We should examine the changes in ROA that happened after hiring new CEOs. If ROAs went up after hiring experienced CEOs or went down after hiring first-time CEOs, we might look more kindly on experience. Plus, see the next quibble.

More important quibble: Cause and effect

Now we’re going to quibble with our sleeves rolled up. There are other plausible explanations that might explain the differences in ROA, and the data reported in the WSJ article do not rule them out.

Say you’re an experienced CEO. What kind of company might be especially eager to hire you? One that’s in trouble — e.g., low ROA — and wants to improve its performance. That would imply that low ROAs “cause” hiring experienced CEOs, as opposed to experienced CEOs causing low ROAs.

Or say you represent the board of directors of a highly profitable company. Are you more likely to bring in a CEO from the outside (by definition, a repeat CEO) or to promote from within? I think the insider, who presumably knows how to keep the good times rolling. Say you’re on the board of an unprofitable company. Do you want the outsider or the insider? I think the outsider, because you want changes made. Net effect: high-ROA companies with first-time CEOs promoted from within to stay the course, and low-ROA companies with repeat CEOs called in to perform a rescue.

Although those explanations make sense to me, I don’t know if they are true or if the professors conducting the research have data that prove or disprove them. And the WSJ article cited a few other ideas, such as repeat CEOs thinking outside the box (score one for experience) but not being familiar with what works in the company or industry (score one against experience).

And the most of important quibble of all...

What did the CEOs try to achieve? What did their boards want? Did they care about ROA or some other metric? Perhaps they wanted something else, such as rising stock prices, accelerating growth, performance bonuses, world dominance, whatever. What matters is what they wanted, not what we think they should want.

The question in reverse

Still, all quibbling aside, the very idea that experience may not be inherently valuable is intriguing. (Which I admit with some reluctance, as I have spent a lifetime accumulating experience. Of course, so have you.) We might ask the question in reverse: why is it even possible that CEOs without experience might outperform CEOs with experience?

There are the hypotheses mentioned in the WSJ article. There are others, such as potential overconfidence among experienced CEOs.

Hypotheses are nourishing to the brain, so I’ll add yet another. I think we have all seen people make different use of their experiences:

• Some people seem to emphasize longevity and achievement when they mention experience. “You should believe me because I have survived many years in this field and achieved success.”
• Others seem to emphasize learning. “You should believe me because I have observed and thought deeply.” NB: learning doesn’t require a classroom.

We’d have to split the CEOs in the study into those groups to see if experience-style makes a difference. I’d hypothesize that it would, that CEOs (and others) who rely on longevity or achievement would underperform those who rely on learning. That’s because longevity and achievement alone merely reinforce previously acquired ideas or behavior, and it takes observation and thinking, which take time, to learn. But until those data are in, all I’ve got is a hypothesis, not facts.

Sadly lacking newsworthiness

So, working solely from what’s presented in the WSJ article, what we have is a questionable headline based on simple statistics that may or may not be significant, meaningful, or properly interpreted. Our conclusion, sadly lacking newsworthiness: we don’t know whether experience is the culprit, the victim, or the statistical equivalent of an innocent bystander.

Chalk it up to critical-thinking experience.

A previous version of this essay was published in the October/December 2010 issue of Competitive Intelligence magazine. Shared by permission.

See also this article, "In Business, 'Flat' Structures Rarely Work. Is There a Solution?", in The New York Times, July 5, 2023. Flat structures, CEO experience, something else... what works?