Why Potential Might Be More Important Than Experience When You Choose a CEO

The right CEO can take an already solid company and make it great. A mediocre CEO might lead to very little change either way. But the wrong CEO can be truly disastrous. When a board of directors chooses a new CEO, there’s a lot riding on the decision. 

More often than not, the board chooses to focus on the portion of candidate who have experience — not just leadership or even executive experience, but experience working as a CEO.

At first, that might sound like a solid strategy. But if your board is writing off talented candidates simply because they haven’t yet served as a CEO, it is doing your company a disservice. Here’s what you need to know before hiring your company’s next CEO.

Why Emphasize Potential as Much as Experience?

If you keep yourself apprised of market research, you might already be aware that many first-time CEOs actually outperform their more experienced counterparts. One often-cited 20-year study of 855 CEOs of S&P 500 companies yielded some surprising insights:

  • Companies with first-time CEOs had higher total shareholder returns (market-adjusted)
  • First-time CEOs saw less volatility in the company stock price than CEOs with more experience
  • For CEOs who headed two separate companies in a row, more than 60% saw their second companies consistently lag behind the stock market
  • Of those same CEOs who headed two companies consecutively, 70% had a better overall performance with their first company

Despite those convincing data points, demand for experienced CEOs has been gradually increasing. But if you’re willing to diversify your pool of CEO candidates, your company might be able to experience the benefits of a skilled, motivated first-time CEO.

Why Do CEOs With Potential Outperform Those With Experience?

It’s hard to fault companies that start their CEO searches by placing a premium on experience. If you aren’t familiar with the research indicating that choosing a rookie CEO might actually make more business sense, you probably think an experienced CEO would be the better choice. 

Why do first-timers often outperform CEOs with more experience? Experts have many theories on this, but here are some of the main ones.

Seasoned CEOs Rely on Old Tactics

Making difficult decisions is a key part of being a CEO. So when a CEO with past experience goes to make a tough decision while at your company, they might fall back on the playbook from their past job. 

Sometimes this works — and sometimes it doesn’t. But in any case, CEOs with experience often view problems with your company through the lens of their previous position. That might make them less likely to develop a solution specifically for your business.

New CEOs, on the other hand, don’t have those same past experiences to fall back on. They see each problem as a new challenge to be solved. As a result, they’re more likely to develop a solution tailored to your business — and custom solutions are more likely to be effective.

This doesn’t mean that experienced CEOs can’t be innovative or that new CEOs can’t be unimaginative, but it’s a generalized pattern that might help explain why newer CEOs tend to be more successful.

First-Timers Are More Flexible in Their Decision Making

In a similar vein, some experts have noticed a difference in how seasoned and new CEOs approach making key decisions. 

First-time CEOs (who tend to be younger on average) often evaluate problems on a case-by-case basis and solve them accordingly. More experienced CEOs will often go by established “rules of thumb” for certain situations. That isn’t necessarily a bad approach, but in many instances, uniquely complex problems tend to require unique solutions.

New CEOs Prioritize Balance

In general, newer CEOs tend to take a longer-term focus compared to their more seasoned counterparts. Many try to strike a balance between both growth and profitability, and they’re typically successful. This might not lead to the largest short-term returns, but it’s a recipe for stability and sustainability.

Experienced CEOs Focus on Cost-Cutting

There’s nothing wrong with periodically cutting costs to save company resources. However, CEOs with past experience tend to maintain focus on cutting costs to the point of harming the company. Overspending certainly isn’t helpful, but neither is cutting costs so much that you can’t effectively innovate, retain your team members, or advertise.

Helping First-Time CEOs Succeed

Hiring a first-time CEO might turn out to be the right move for your business. However, you shouldn’t simply choose your candidate and then expect them to run the company effectively with no introduction.

Just as you would with any executive, make sure your CEO has a thorough, customized onboarding process to help them get familiar with your company policies and values. You should also have some type of ongoing training. Mentorship can be valuable, especially if any other C-suite executives have experience as a CEO.

Alternatively, you might consider offering complimentary executive coaching. Becoming a great CEO is like learning any other skill. You can probably master it yourself eventually, but having an experienced teacher or coach will make learning faster and easier. 

But what if your goal is to one day promote an existing employee to CEO? That’s where early training comes in. When you make an effort to identify employees with potential early on, you can gradually teach them what they need to be great executives. If they’ve learned relevant skills over several years, they’ll be ready to hit the ground running once they’re promoted.

What’s More Important When Choosing a CEO?

Ultimately, it’s up to your board members to decide which factors should be weighed the most heavily during the selection process. You don’t need to disregard candidates with past CEO experience — many of them go on to successfully lead other companies.

However, it’s always a good idea to diversify your candidate pool by considering promising candidates who may not have CEO experience yet. This tactic has an added bonus: if you’re willing to hire a first-time CEO, it becomes easier to train and promote from within the company. Opening up your CEO pipeline means there’s more competition for your company’s top spot, and that’s a great thing for your business!