Twitter Turmoil: Why Using Interim CEO Is A Bad Idea

by CXOtoday News Desk    Jun 15, 2015

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Twitter chief Dick Costolo is leaving the company in two weeks, and co-founder and chairman Jack Dorsey will be taking over as interim CEO. This a response to the company’s sluggish growth for the past several quarters. Investors were growing impatient with Costolo, which they believed quickened his departure. But, what will be the fate of the company? Will the interim CEO phenomenon work? Will Dorsey take over permanently? These are questions playing on everyone’s mind.

Researchers at the University of Virginia explored the interim CEO phenomenon, and their findings provide context for how Twitter will fare under Dorsey.

In their 2007 research paper “The use of an interim CEO during succession episodes and firm performance,” published in the Strategic Management Journal, University of Virginia professors Gary A. Ballinger and Jeremy J. Marcel found that about 17 percent of CEO successions of public companies install an interim CEO for 45 days or more before settling on a permanent one. They also concluded it’s a decision companies should prepare for in advance.

Researchers found 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.

For their study, the researchers looked at 2500 public company CEO transitions in the years 1996-1998, and evaluated their performance seven years after making the transition. 

They don’t stay long. The vast majority of interim CEOs stay for at least a quarter (92%), but just a third of them stay on for more than a year, says the study.

The biggest drawback is that the performance suffers, believe researchers. Firms that appoint an interim CEO as part of their succession process have lower return on assets and are more likely to fail than those that appoint a new permanent CEO right away. But chairmen do better as interims. The majority of interim appointments are insiders, and 42% are the current chairman like Dorsey. The researchers found that firms that appointed the chairman as interim CEO were less likely to fail and had better return on assets than firms that appointed a non-chairman.

One of the main benefits of an interim CEO, according to the researchers, is that it makes it easier to search for a new chief executive unencumbered by the interests and biases of the old CEO. Sitting executives can exert influence on the search for a replacement, often in order to preserve their own legacy, mentions Walter Frick a senior associate editor at HBR in his blog.

Though interim CEOs do not have a long-tern vision. The researchers interviewed three former interim CEOs and conclude that they focus their “attention on short-term, tactical crisis management.”

However Twitter’s transition isn’t necessarily typical, argues Frick. In the researchers’ sample, interims were more likely to be older than the executives they replaced. Dorsey is 13 years Costolo’s junior. Dorsey is also Twitter’s former CEO, and has also reportedly coveted a return to the top job. In a recent interview, he said he’s focused on his role as interim CEO, but didn’t rule out taking the position full-time. Finally, Dorsey is also the CEO of Square and will continue in that role simultaneously.

Research suggests that Dorsey’s status as co-founder and chairman leaves him relatively well positioned to navigate the transition. But perhaps the biggest clue as to whether he’s truly taking an interim role vs. auditioning for the job will be the moves he makes in the next few months. If they’re mostly tactical, that could be a sign the company is waiting for a new CEO to adjust its path. If he starts making major changes to strategy and vision, that might mean he’ll be around for a while.

Prince Alwaleed bin Talal, one of Twitter’s earlier investors, believes the social messenger’s interim chief executive should not get the job permanently because of his other job commitments, he was quoted by the FT as saying.

“Jack has another company called Square which requires a lot of attention and a full-time job round there. I believe and trust that Jack Dorsey is there on a temporary basis” Alwaleed was quoted as saying in an interview with the Financial Times. “The new leader has to have tech savviness, an investor-oriented process and a marketing mentality” he added.

Alwaleed first invested in Twitter in 2011, paying $300 million in a joint purchase involving his personal wealth and funds from Kingdom Holding, the investment company in which he owns most of the stock. Dorsey told Reuters that he was not thinking at all about remaining CEO permanently because the search has just begun, but did not rule out the job either.