A growing number of chief executives are exiting their positions prematurely, according to a new study.
In a survey of 184 publicly traded firms – among them are oil giants like Shell Oil Co. and Texaco Inc. – 27 percent of CEOs left their positions within three years.
The rapid dismissals may be due to what the study refers to as “information asymmetry,” circumstances where one party knows less inside information than the other, which can result in the board of directors making a faulty hire, according to Yan Zhang author of the study at Rice University’s Jesse Jones Graduate School of Management.
A lack of knowledge about a candidate’s competencies can result in faulty hires, for example, the study notes.
The origin of a new CEO is vital to the equation – whether he or she was an internal or outside hire – because internal candidates are chief financial officers or executive vice presidents and familiar with firm’s modus operandi, the study adds.
“They would have had numerous opportunities to interact with the board members,” said Zhang. “The board has a great opportunity to know inside candidates, thus reducing information asymmetry between the board and inside candidates.”
It seems hiring external CEOs can be not only risky, but also expensive.
Another recent study found that chief executives hired externally at Standard & Poor’s 500 companies received a median total compensation package of $12.2 million, compared to median compensation of $6.9 million for internally hired CEOs.
The study by Equilar, an executive compensation research firm, looked at nearly 1,300 large, medium and small companies and found compensation disparities between external and internal CEOs across the board.
The Rice study looked at CEO successions between 1993 and 1998 at 184 publicly traded firms with annual revenue of more than $100 million.