Top CEOs typically have outsider mindset and programmatic M&A approach

29 June 2017 5 min. read

Exceptional Chief Executives tend to have an outsider mindset, allowing them to bypass internal struggles to move businesses forward, according to a survey of 600 S&P 500 CEOs. One aspect of the move towards success is a relatively aggressive 'programmatic’ approach to M&A.

New research from McKinsey & Company explores key features of ‘exceptional’ across the 600 CEOs in the firm’s sample of executives of S&P 500 companies. Those termed ‘exceptional’ are the top 5%, whose companies’ shareholder returns saw a more than 500% increase over their tenure. The firm’s analysis further explores the deal making strategy of new CEOs, and the respective effectiveness of the strategies.

Exceptional CEOs are more likely to be external hires

Top performing CEOS

The research notes a number of trends that sets exceptional CEOs out from the rest of the pack. One feature is a considerably higher concentration of external hires in the group, at 45% of the sample of 22 CEOs compared to the average of 22% overall. The finding builds on previous research from McKinsey, which found that CEOs with outsider mind-sets more likely to make better decisions.

The firm notes, however, that the majority of those termed exceptional were internal promotions. The discrepancy between two groups is in part the result of one of the attitude and distance from the organisation that new CEOs bring to the table; they are often not caught within the internal inertia and politics, which allows them to tackle toxic culture and act in a more objective manner.

CEOs with exceptional track records

The research also found that exceptional CEOs were 58% more likely to enact strategic reviews within the first 2 years of their tenure, than average. Exceptional cases also tended to make 23% fewer management reshuffles, launched 40% fewer businesses/products, and were 48% less likely to enact an organisational redesign.

Researchers also noted that exceptional CEOs are more likely to make a larger number of strategic moves than the more conservative average, in the first year.New CEOs under pressure to move fast in M&A deal activity

The CEOs tended to also lean more towards cost-reduction programmes, the freed resources used to resource their sometimes new strategic direction for the company.

M&A activity among new CEOs

Research from McKinsey also highlights that a ‘programmatic’ approach to M&A, whereby the average number of deals remains relatively stable and no more than 20% of the firm’s total market capitalisation is acquired over a ten year period, tends to result in a 3% excess total returns to shareholders, compared to one large deal (valued at 30% of the firm’s market capitalisation), and which transforms the firm in one sweep.

Aside from the strategic moves made by CEOs during their initial tenure, the consulting firm also explores the number of M&A deals made during their initial years of tenure. Finding that on average new CEOs tend to follow a programmatic approach. They tend to come in with a slightly more aggressive approach than the average of the preceding five year period however, particularly in the first five years of their new role at the head of the business.

Top- and bottom-quartile CEO M&A activity

The research also sought to identify the difference between top and bottom-quantile CEOs in terms of M&A and divestment activity in the first years of tenure. The research finding that those among the top tended to be more aggressive in the first seven years, entering into around 30% more deals by year two than in year one, with a similar level of activity in year three. Bottom-quantile performers, however, saw their activity begin to taper off by year three, at 83% of activity relative to year one, while, by year five, they were performing 50% of the activity relative to year one, while top performers were at the same level as in year one.

Concluding the paper, the authors noted, that similarly to  other strategic initiatives launched by incoming CEOs, transaction momentum tends to wane. After making big moves early on, CEOs tend to ride with the changes during the middle of their tenure. 

While in the short-term that might give the organisation a break from the strains associated with integration and change however, the authors warn, "Later on, however, it may reflect a penchant for conservatism and an unwillingness to take on additional risks toward the end of one’s tenure. If not addressed, this creeping bias for inaction can hurt a company’s performance as opportunities are missed and needed changes are not acted upon.”

Related: CEO turnover at a record high, outsider executives gaining terrain.