Is hiring an interim CEO a worthy strategy to adopt?
When Twitter’s CEO Dick Costolo decided to step down from his role, the company named its co-founder & former CEO Jack Dorsey as the interim CEO until the brand looked for a replacement. It’s a different story that Jack Dorsey is now the new CEO of Twitter. However, Twitter isn’t the first company to hire an interim CEO. Organisations like Rhapsody, Barclays, American Apparel, Mozilla Corporation, Reddit and others have also hired interim CEOs in the past.
Closer home, we have examples such as Rishabh Gupta, who was serving as an interim CEO at Housing.com till Jason Kothari’s appointment as the CEO in November. Sudhir Mathur who was the interim CEO at Cairn India for a brief period of time in 2014, and Ravishankar Gopalakrishnan who served as the interim CEO for Jet Airways in 2014 for three months.
A corporate leader selected for the role of a CEO is expected to have mastered the art of running an organization and a well chalked-out corporate strategy shows its results over time. So why do board members allow a leader to take charge of their company affairs for a time-bound period?
More often than not, hiring an interim CEO is led by reasons such as crisis management, the needed direction change, new technology implementation, turnaround and restructuring, keeping up employee morale, pre or post-merger direction, succession planning, gaining a fresh perspective to existing challenges or handling downsizing or upsizing. However, there have been instances when interim CEOs were hired for replacing a CEO who were fired for misuse of corporate funds, voluntary exits, involuntary departures, lacklustre performance, or sexual misconduct.
Our own market mapping has revealed that there are few common reasons that compel corporate to appoint an interim CEO. In most cases, a qualified interim CEO can be in place in less than a week. The presence of an interim CEO ensures business continuity especially against the backdrop of a sudden CEO exit, while the board members can focus on setting the stage for the next permanent CEO. Equally importantly, an interim CEO not only becomes the face of the company to the world, but is also in a position to take speedy strategic decisions. The interim CEO becomes the critical point of contact for a company’s board and investors.
Whatever may be the reason for exits, hiring an interim CEO to manage the reigns until an organization finds a suitable replacement is steadily becoming a hot strategy across the globe.
The board reacts differently in different situations of CEO departure. In case of voluntary departure by a CEO, the board usually gets caught unaware of the CEOs plan of exit. So this gives them very limited time to search for a CEO. Although, there may be a reasonable notice period given by the exiting CEO, yet it causes some discomfort in the company which requires significant time to manage. On the other hand, if the CEO is ousted by the board, the latter has a plan in place while doing so. The board usually identifies the interim CEO much ahead. In most cases, it is the person second in line to the CEO, someone who is well aware of the functioning of the company, giving the board adequate time to plan a replacement.
An academic research by Professors Gary A. Ballinger and Jeremy J. Marcel from University of Virginia in 2007 concluded that about 17% of CEO successions of public companies install an interim CEO for 45 days or more before settling on a permanent one. The research also claims that companies typically experience lower returns on assets and decreased market value during the interim period compared to those that transition to a permanent CEO - and that the potential downturn grows increasingly worse the longer the interim period lasts. Our research on interim CEOs highlights that the average tenure of an interim CEO is about five- six months as it typically takes anywhere between four - six months to find a suitable replacement.
What attributes should the board focus on while looking foran interim CEO? Strong business acumen followed by flawless client management skills, hands on operational excellence and efficient people management skills are a few pivotal traits of an interim leader.
Contrary to a few academic studies, our findings show that the probability of an interim CEO being successful is as high as 50%. Most of the interim CEOs are good operational leaders who focus on a specific business goal during their tenure. Interim CEOs may not be strong strategic thinkers always and hence it might not be a good option for companies to continue with these leaders for long who are appointed by a vacuum situation.
Quite often, the reasons for success of interim CEOs are the softer aspects of their individual personalitysuch as their focus on getting things done, lack of any personal agenda and absence of a grand vision for the business that may involve a top-down approach or aforced buy in from the entire workforce. Interim CEOs usually work towards an exit and with a specified job at hand that often leads them to work hard to find solutions to the challenges, hire able recruits who can take as much responsibility as possible thereby helping them bring the best out of them.
In India, the last two years have witnessed an increasing receptivity for hiring interim CEOs especially in sectors like technology and outsourcing, pharmaceuticals, healthcare, life-sciences and non – IT Indian business houses. The reasons to hire an Interim CEO can be many and varied. Exits and turn-around are both high risk propositions, sometimes they work and at times they don’t. There are several examples of interim CEOs turning around companies and taking them to the next level. Whatever may be the outcome of an interim leader appointment, the truth is, today the board of directors and stakeholders find interim appointments to be a viable alternative to finding the right CEO. As the renowned professor at London Business School, Julian Birkinshaw exclaims, interim executives are the true models of modern management because they are only there for a short while.