In the corporate world, the revolving door for CEOs is constantly spinning. The same seems to be true for coaches of any sport, whether it is soccer, the NBA, or college football. Change is good. Too much change, however, is frustrating; not to mention disruptive and often counter productive.
Why, then, are fans and shareholders often anxious to replace the incumbent? The answer lies in the fact that a change at the top is the fastest way to modify, or even reset, an organization’s contract. Which contract? I am referring to the culture-defining contract that exists between the organization and its employees. This contract is so critical that when we talk about it, we use a capital “C.” An organization’s success is built on the Contract, and the organization’s chief executive officer is primarily responsible for building, maintaining, and modifying the Contract. This is item number one on the job description, and it’s the one aspect of his or her duties that cannot be overlooked.
The Contract is built on the unique relationships that exist between the organization and its employees. Some of those relationships are explicit (e.g., you work these many hours and the organization will you pay you for your services). Yet, like an iceberg, the explicit agreements communicate only a small portion of the story.
Like the ice under the water, it’s the implicit agreements (the psychological contracts) that represent the bulk of an organization’s Contract. When built and managed correctly, an organization’s Contract is foundational in creating great products, great values, great customer experiences, and great returns.
Hopefully, it is self-evident that it’s a risky proposition to hand this crucial obligation over to someone who is new, let alone to someone who is an outsider. Yet, when the wheels start coming off the bus, our instinct tells us that something is wrong with the Contract. And, instead of taking the time to diagnose and find the source of the problems, our knee-jerk reaction is to place the blame on the CEO’s abilities and look for someone new to manage the Contract. Forget about mending the Contract; everyone starts looking for someone new that has an established brand and brings with them a whole new Contract – one that is shiny and fresh.
But, is an outsider always the right decision? Sure, there are notable success stories. Steve Jobs’ second tenure at Apple immediately comes to mind. Nick Saban, the American college football coach who led challenged teams to three national titles, is a demigod in the state of Alabama. The problem is that success stories like these are outliers. They’re not the norm. Because they are wildly successful, popular media makes them a story, which then reinforces the public’s belief that choosing an outsider is the right approach. This is a classic example of the availability heuristic—the phenomenon that explains why our most recent memories impact our decisions1. Likewise, looking for a new CEO, coach, or leader can be neurologically rewarding. Participants experience the thrill of the hunt, secure in their belief that the next “big one” is right around the corner.
Endorphins are everywhere. The potential rewards seem enormous.
Yet, statistical averages tell us otherwise. Remember that most of us are average, and, by definition, half of us work for businesses that are underperforming. Why do we expect the list of game-changing leaders to be long enough to save all the companies that need help? There simply aren’t that many Phil Jacksons to go around to save every team in the NBA.
While choosing the right leader may be the shortest path to success, a CEO change is no guarantee of success. Consider Marissa Mayer’s tenure at Yahoo. Most believed the “wunderkind” from Google would surely save the tech giant’s future. After all, an executive-level Google pedigree is enough to turn any company around, right? The scorecard, however, for Ms. Mayer is incomplete, and there are signs that Yahoo still lacks focus and discipline2. Patience is a virtue that receives more lip service than practice. With the hype and intrigue associated with a new CEO, shareholders, analysts, and boards of directors seem reticent to give the newcomer the time he or she needs to tweak, or even rebuild, the company’s Contract.
When deciding on how to find the best candidate as your next CEO, you might consider the following before you choose. First, remember that an outsider may be at an immediate disadvantage. Expectations will already be too high. As such, a newcomer may not be afforded the time frame required to understand and define the changes that need to be made to the organization’s Contract. Second, an outsider might be set in their ways and too beholden to what worked at predecessor companies (i.e., forcing a square peg into a round hole). Or, third, statistics will rear an ugly head, and give you a candidate that is no better suited to the task than the three or four internal candidates that are available (and, quite possibly, have already developed a turnaround plan through an in-depth knowledge of the organization).
Extra care should be given when selecting an outsider. Can an outsider be successful? Absolutely! But for every Marissa Mayer, there is a Mary Barra.
Ms. Barra has been with General Motors for years, starting her career with GM as a co-op student when she was 18 years old. She moved through the corporate ranks to become GM’s first female CEO in January of 20143.
Recently, she has been praised for how she dealt with GM’s ignition scandal, and many have suggested that Volkswagen should follow her lead as they deal with their current emissions quagmire4. Success can come both ways – from the outside and from the inside. But, before the allure and appeal of an outsider clouds all judgment, it’s also important not to overlook what may very well be within the walls of the organization. Sometimes, an outsider really is the right option. But, bringing on an outsider also carries a good deal of risk. And it’s precisely that risk that many companies overlook in their quest for the next organizational hero.
 Nicholas Carson, The New York Times Magazine, December 17, 2014 – http://www.nytimes.com/2014/12/21/magazine/what-happened-when-marissa-mayer-tried-to-be-steve-jobs.html
 Jonathan Chew, Fortune, September 23, 2015 – http://fortune.com/2015/09/23/volkswagen-ceo-mary-barra-gm/