Chief executives new to the job are three times more likely to get fired for poor performance — even when they perform no worse than their more experienced peers, according to research from Duke University's Fuqua School of Business.
Professors Shane Dikolli and Bill Mayew, along with of Dhananjay Nanda of the University of Miami, found CEOs with less than five years' experience performed just as well as those who have been at the job longer, but the newer CEO's jobs were at much higher risk when company earnings fell below expectations.
"The labor market tends to care more about a young CEO missing benchmarks than an experienced CEO," Dikolli said.
The researchers examined the quarterly earnings of 1,725 public companies between 1996 and 2005. They found CEOs with more experience missed earnings targets just as often as newer CEOs. But for chief executives with less than five years' tenure, each negative quarterly earnings performance increased their chances of being fired by between 34 percent and 43 percent. For the more experienced CEOs, the chance of termination went up only 4 percent to 11 percent.
They also found more experienced CEOs were monitored and evaluated less often by the board of directors. Essentially, time on the job appears to buy some insulation from poor performance, at least in the short term. The researchers concluded that poor performance could lead to greater turnover among CEOs with less experience simply because boards know less about them.
"More experienced CEOs don't need to worry as much about missing accounting forecasts," Dikolli said, "because they have a track record."
More experienced CEOs were also more likely to encounter fewer governance constraints than their newer counterparts. For example, the longer a CEO is retained by a firm, the more likely that there are fewer board meetings are held on average and the board is likely to have fewer independent members.
"The more that is known about a CEO who has been at the helm of the firm for a long period of time, the less the need to scrutinize the CEO's actions through more board meetings or appointing more independent members of the board," Dikolli said. "This complements the finding that labor markets are less interested in missed benchmarks for more experienced CEOs."