Picture a board meeting two quarters after a new chief executive has taken over from an interim. The numbers are soft, and a couple of directors have said so to each other over coffee. When the subject finally comes up, someone points out that the company has just spent most of a year without a permanent leader, and that pulling the trigger again so soon would do more damage than the shortfall. Nobody argues with that. The new chief executive is still settling in, and the item moves to next quarter.

What the study found

Robert Langan of Esade set out to test whether that meeting is as common as it sounds. He followed 346 chief executives at S&P 1500 companies appointed between 2002 and 2015, half of them successors to an interim CEO, and compared how likely each group was to leave within three years when the company's returns were poor. When performance sat one standard deviation below the mean, a successor to an interim was about 86% less likely to depart early than a successor to a permanent CEO.1

The paper then asks why. Directors might be guarding their own reputations, since removing the person they picked after an interim search would advertise a second mistake. Or they might be guarding the company, which has already been through two successions in a short span and would look like a firm in turmoil after a third. Langan finds some evidence for the second explanation, including a reluctance that was somewhat stronger where outside directors owned more of the company's stock, and he cannot rule the first in or out. He is plain that the paper "cannot make a definitive conclusion regarding what drives directors' reluctance."1

His further analysis gives the cautious directors some cover. Dismissing a successor to an interim early in the tenure was associated with weaker market returns over the following year, and a dismissal two years into the job went with a drop of about 20% in industry-adjusted shareholder return. Keeping a struggling chief executive in this situation, Langan writes, "might be made in good faith and actually be the best governance decision available."1

What the comparison cannot price

I would be careful about how far that evidence travels. The market test sets one kind of early exit against another, and it accounts for how the company was doing beforehand. What it cannot do is set an early exit against the road the board actually took, which was keeping the leader, because nobody gets to observe both. So the study prices another change against an ordinary one. The price of three more years of soft results is left for the directors in that meeting to estimate, and they are estimating it every time the item slides to next quarter.

The decision made a year earlier

The most useful part of the paper, to my eye, is where it locates the problem. Interim periods are expensive, as the earlier research the paper reviews makes clear: interim chief executives hold little authority to make strategic calls, and company value falls while the board searches.1 Those costs do not stop when the permanent leader arrives. They follow the company into the next decision, because any further change would now be the third succession in a few years. Boards, Langan suggests, may appoint an interim expecting that "all will return to normal" once a permanent CEO is in place. What they have actually done is raise the stakes on that one hire and narrow their own room to correct it.

His advice follows from that. He calls the finding a warning boards should weigh before appointing an interim at all, "and in deciding how they will evaluate the CEO ultimately appointed to succeed permanently."1 The second clause is the practical one. A board that knows it will be reluctant to act in year two has to settle the measure and the review date before the new leader starts, while the disruption is fresh and the person is not yet anyone's decision to defend. Then the meeting two quarters in has something to look at besides the memory of the gap.

Below the boardroom

The study covers chief executives of listed companies, and Langan notes that the findings may not apply to private firms. My guess, and it is only a guess, is that the same reflex shows up lower in an organization, where a vice president who follows an acting vice president, or a function head who arrives after a reorganization, gets the benefit of everyone's fatigue with change. I wrote recently about what a reorganization spends in team familiarity, and this looks like the next item on the same bill. If you are the person who followed the interim, the patience is real, and it was granted for reasons that have little to do with you. If you made the appointment, decide now what you will look at in a year, and who will look at it.

Think of the last leader you put in place after a stretch of acting leadership. What did you agree to review them against, and has anyone looked since?