Outside CEOs and innovation

Abstract

Innovation is the principle driver of firm and economic growth. Thus one disturbing trend that may explain stagnant growth is a 65% decline in firms’ RQ. We propose that the rise of outside CEOs is partially responsible for the decline. While this proposition was motivated by interviews with CTOs, we test whether it holds at large scale. We find that firm RQ decays during the tenure of Outside CEOs relative to that of internal CEOs. We further find this effect is more pronounced for firms with high R&D intensity, and for CEOs with more remote experience. Thus the decay appears to stem from lack of domain expertise. Note however we do not advocate avoiding outside CEOs. Rather we caution that firms consider their implications for innovation.

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