Research: Why CEOs Should Start with the New Year
Boards know the importance of careful succession planning. The benefits of a strong transition to a new CEO are obvious, but a failed succession can cost companies billions in shareholder value, be distracting and disruptive for employees, and cause other top talent to head for the door. In a new study, we discovered a way boards can help their appointees drive value: start them at the beginning of the calendar or fiscal year.
In new research, published in the Journal of Management, we studied CEO 'phase entrainment'—in other words, the synchronizing of the appointment of a new CEO (firm cycle) with the beginning of a yearly cycle (dominant cycle)—to see whether it had an impact on the firm's post-succession performance. Our sample consisted of 690 CEO successions carried out by S&P 500 firms between 2005 and 2019.
We compared start dates of new CEOs against firms' return on assets (ROA) over the 12 quarters following the succession (as past research has found that it takes three years to fully capture the effects of a new leader). We found that when CEOs began their tenures within 10 days of the calendar or their firm's fiscal year (which is around 25% of successions in our sample), their firms experienced, on average, a 0.4% higher ROA than firms whose CEOs started at any other point in the year. This effect might seem small but it equates to a nearly 31% difference in ROA compared to our sample's average ROA and begins to fade after the first 10 days. We also found that this synchronization resulted in heightened net income for these firms, on average, over the same post-succession period—and the effects were even stronger for CEOs who were firm outsiders, under 46 years of age, women, or members of racial or ethnic minority groups.
Why Synchronization Matters
In analyzing our data—and conducting additional surveys and interviews with incoming and outgoing CEOs, CHROs, board members, and other stakeholders, we found that appointing a new CEO to synchronize with the beginning of the calendar or fiscal year creates benefits for three reasons:
Alignment of Goals and Objectives
The end of the calendar or fiscal year marks a time in which results are expected to be achieved, and the beginning of the year is when new goals are set. Appointing a new CEO in the new year allows them to set the company's goals and objectives according to their own vision for the firm. Temporally aligning the efforts of organizational members with the goals and objectives of the new CEO allows organizational members to work in a more coordinated manner towards the realization of those goals.
Minimization of Disruption
The appointment of a new CEO is a major disruptive event for any company regardless of the reason for the CEO change. The beginning of a calendar or fiscal year presents a natural breakpoint to interrupt the work of organizational members. Synchronizing a new CEO succession with the beginning of the calendar or fiscal year allows enough time for organizational members to regain focus and attention on tasks and projects before results are expected, thus reducing disruptive effects associated with CEO succession.
Decrease in Time Pressure
There is always pressure to perform—particularly if you're a new CEO. However, this pressure is especially strong closer to the end of a calendar or fiscal year, when firm results are more closely scrutinized and employees often have performance reviews. CEOs that begin their tenures in the middle of the year are, for example, more likely to feel the pressure of earnings management, which can negatively impact their decision-making. Thus, appointing CEOs at the beginning of the calendar or fiscal year can alleviate time-induced pressure, enhancing decision-making and ultimately operational performance.
Additionally, employees, too, feel the end-of-year crunch to prove in numbers their successful fulfillment of goals. If new goals or directions were handed-down mid-year, this gives them less time to make progress toward them by the time they're evaluated—not meeting goals can feel demoralizing and risks hurting employee engagement.
Why The Effects Are Stronger for Atypical CEOs
Although our analyses revealed that firms reap operational performance benefits regardless of who they choose as successor, we found that these effects are particularly strong when the new CEO is 'atypical,' meaning that they have characteristics that are not commonplace in the broader CEO population. Specifically, we considered CEOs as atypical when they were outsiders (i.e., appointed from outside the firm), young (46 years old or younger), women, or members of racial or ethnic minority groups.
A new calendar or fiscal year—more than just a marker of time—is imbued with meaning for people, often making them feel like they've been given a fresh start. At the beginning of these cycles, employees are more open-minded and willing to learn new skills or accept new ideas. As previous research has shown, atypical CEOs are more likely to enact major strategic change; we propose that aligning firm cycles with this period of heightened openness means that atypical CEOs' strategic initiatives are more likely to be accepted or enacted. We believe this helps explain firms' stronger performance when atypical CEOs' start dates are phase entrained.
Some Caveats
We recognize that appointing a new CEO at the start of the calendar year or the fiscal year might not always be possible for firms. At times, companies need to dismiss their CEOs and rapidly appoint new ones. Or a CEO might need to suddenly step down for health or personal reasons, hindering ideal appointment times. This said, we believe that even those firms that must make more sudden changes could benefit from our studies' insights; for example, considering how they might frame a succession as a fresh start or adjusting employee performance evaluations to give them more time to execute on a new vision.
Additionally, our study was based on calendar events that are particularly relevant to Western societies (e.g., January 1 as the New Year in the Gregorian calendar). However, such dates may not have the same meaning in other non-Western countries. Boards should assess what times are relevant to their particular contexts.
. . .
After long and often laborious search processes, boards want to do everything in their power to ensure their appointee is successful in their new role. Our study provides strong evidence that synchronization is an important mechanism that boards can use to give their new CEO a competitive advantage, helping them to align their vision with their employees while driving operational performance.
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