September 9, 2026
Insights
The selection of a new chief executive officer (CEO) is one of the most strategic decisions for a corporation's board of directors.
Globalisation and technological advancement have transformed the industrial structure of high-income economies such as Australia, shifting them towards increasingly specialised service industries operating in a highly competitive global marketplace. As a result, the CEO role has evolved to place greater emphasis on strategic decision-making capabilities, requiring broader general managerial expertise rather than knowledge that is specific to a single organisation.
The growing preference for outsider CEOs has, however, created a significant challenge for boards seeking to assess the capabilities of external candidates. Unlike internally developed executives, whose suitability for promotion can be evaluated using extensive and trusted performance data accumulated over many years, outsider CEO candidates are typically less familiar to the appointing organisation. Consequently, boards must make succession decisions based on more limited information, much of which is inherently less reliable than internally generated performance evidence.
In response, organisations have developed more sophisticated approaches to evaluating prospective CEOs, including through engaging executive search firms to facilitate the identification, assessment and selection of new CEOs. Executive search firms play a critical role in legitimising CEO appointments by signalling to stakeholders that a rigorous and independent selection process has been undertaken. They also work closely with boards and leverage their professional networks to identify prospective CEO candidates. They conduct structured interviews, obtain 360-degree reference checks, undertake comprehensive leadership assessments, verify candidates' credentials through multiple referral sources, and facilitate negotiations throughout the appointment process.
Directors also frequently recommend prospective CEO candidates whom they know personally or have previously worked with through their own professional networks, further influencing the pool of candidates considered during the succession process. While such referrals are common practice, the outcomes of these referrals have not been explored. Professional director-CEO relationships likely cover important performance information that is of value to the employing company and, as such, reduce the informational disadvantage of the employing company about the track record of a CEO candidate. On the other hand, these relationships also create the possibility for collusive behaviours. Is this the case? Do director-CEO past professional connections matter in the selection of a new outsider CEO and, if so, are they viewed positively by the investors of the employing company?
Sheldon Harris Partner, Andrew Valentine addressed these questions by examining the role of board-CEO ties in outsider CEO successions and their effects on company performance across 22 high- and middle-/low-income countries where there are significantly different institutional environments and approaches to corporate governance. In a research article, ‘Do board-CEO ties in outsider CEO succession raise companies’ returns?’ published in the International Journal of Managerial Finance, Andrew found that board-CEO ties matter in outsider CEO successions. The research also found that these relationships can serve both investors’ and management’s interests depending on the nature of the institutional context.
Andrew shared, “Having conducted many CEO searches over the course of my professional career, I was interested to explore what role board-referred candidates may play in CEO succession events. It is not uncommon that company directors refer known prospective CEO candidates to contracted executive search firms as part of CEO searches. As such, I was curious to understand what effect, if any, these referrals might have had in the CEO succession process. Thankfully, data proved available to examine whether board-referred outsider CEOs achieved measurably different financial outcomes relative to non-board-referred outsider CEOs.”
Overall, the study involved 1,136 outsider CEO successions that occurred between 1990 and 2020. The study included 95 public company CEO successions in Australia, 606 in the United States, of which 139 involved Fortune 1000 companies, and 146 in the United Kingdom. Other countries represented included Belgium, Brazil, Canada, China, (inc Hong Kong), Czech Republic, Denmark, Finland, France, India, Italy, Germany, Japan, the Netherlands, Norway, Portugal, South Africa, Spain, Sweden and Switzerland.
Commenting on the sample, Andrew said, “the wide range of countries selected represents an attempt to conduct as an exhaustive global study of the question as possible, given the availability of company data from financial databases including Bloomberg, Compustat Global, Datastream and BoardEx. I had hoped to extend the study to additional countries but the availability of relevant company and financial data, including cumulative market-adjusted returns (CARs), return on assets (ROA), return on invested capital (ROIC) and return on sales (ROS) as well other metrics such as market capitalisation, market-to-book values and industry information was limited to companies in these markets.”
Another factor in the selection of the wide-ranging sample is the relative scarcity of outsider CEO successions. “Corporations typically select an outsider CEO when change is needed and, as such, the majority of CEO transitions involve internal successions”, Andrew said. “To address the question of whether board-referred CEOs in outsider successions matter, it was therefore necessary to develop an international sample, given the range of control variables required to construct valid empirical regression models.”
Commenting on the study’s results, Andrew observed, “board-CEO ties matter in outsider CEO successions but their effects vary depending on the financial metric used and by approaches taken to corporate governance in unique institutional and jurisdictional environments. Interestingly, in Australia, professional board-CEO ties areas sociated with mildly negative market and accounting-based measures over 12-and 36-months post-succession performance periods.” Interpreting this result, Andrew furthered, “this may be a result of Australia’s relatively transparent institutional structures, where market disclosures are common. As a result, relevant information about the identity and affiliations of new CEOs have possibly already been disclosed to the market and are therefore widely and publicly available.
“These Australian results are consistent with those achieved for the United States, United Kingdom and Canada, which are also common-law countries that take similar approaches to corporate governance regulation. By contrast, in markets where average governance transparency indicators are lower, as in continental Europe, opposite results emerged: board-referred outsider CEOs positively affect CARs, ROA and ROIC.” Andrew furthered, “these results are consistent with the argument that where a more severe market information asymmetry is likely, board-CEO ties can reduce the hiring corporation’s disadvantage toward the new CEO.” That is, board-referred outsider CEOs are associated with positive market- and accounting-based measures of financial performance.
Results also showed that in countries with markets listing large, family-owned companies but where governance transparency is relevant because of their openness to foreign institutional investors, such as Hong Kong and Japan, the appointment of an on-board-referred outsider CEO positively affects CARs. However, the appointment of a board-referred outsider CEO, which somewhat maintains the company under broad family control, has no statistical effect. Finally, in emerging markets that are open to fewer international investors, like Brazil, India and South Africa, prior professional board-CEO relationships have no detectable effect, nor do non-connected CEOs.
Summarising the findings, Andrew noted, “the study provides novel global evidence of the role of company directors in referring prospective outsider CEOs in CEO succession events. While it does not directly address the important mediating role played by executive search firms in high stakes CEO successions, it does highlight the prevalence and role of board-CEO ties. Of the 1,136 CEO successions studied, 500 (or 44 percent) involved a board-referred outsider CEO where the newly appointed outsider CEO had previously worked with at least one of directors on the employing corporation’s board.
“These connections weren’t made at school, university or the tennis or country club but through having previously worked together at the same company. It would be super interesting to further examine how some of these broader networks function or possibly how the strength of ties affect outcomes,” Andrew shared.
For directors sitting on nomination committees, the findings offer a practical guide rather than a blanket rule. In jurisdictions with heavy disclosure requirements (such as in Australia), professional networks are unlikely to add meaningful value in a CEO search, and boards should not expect a bonus market reaction simply because a candidate had a prior tie to the boardroom. In markets with lighter disclosure regimes, the calculation shifts: professional relationships between a sitting director and an outsider candidate can genuinely close an information gap that public records cannot fill, and the research suggests that investors reward this.
For investors examining an outsider CEO appointment, the lesson is to look past the resume to the institutional setting the company operates in. Where transparency is already high, a board’s professional contacts are no substitute for a rigorous search process.
Board directors
- Assess the market’s disclosure framework before treating a director’s prior relationship with a candidate as evidence of value.
- Record how each candidate was sourced, assessed and compared to support board independence and shareholder review.
- Use prior working relationships as one source of evidence rather than as a substitute for references, due diligence and market testing.
Nominating committees
- Define the leadership requirements before reviewing candidates or accepting director referrals.
- Apply the same assessment criteria to connected and non-connected candidates.
- Document conflicts, recusals and the role of each director during candidate selection.
Investors
- Examine the disclosure regime surrounding the appointment before interpreting a board connection as a benefit or governance risk.
- Review shareholder returns and accounting performance separately because the measures may move in different directions.
- Assess the appointment process, candidate record and board independence rather than relying on the existence of a prior connection.
Interested to learn more? Feel free to contact Sheldon Harris at contactus@sheldon-harris.com or reach out directly to Andrew Valentine.
Published: 9th September 2026
