Interim CEO

An interim CEO is typically the president of a board or another external board member for a transitional period until a long-term successor is appointed or the Chief executive officer (CEO) returns. The interim CEO is elected by the board of the company when the title of Chief Executive Officer is vacated by the incumbent and the Board has not announced a permanent successor, but instead designates a specific individual as "interim CEO," "acting CEO," or "CEO until a permanent successor is appointed." Traditionally, interim CEOs are considered administrators whose primary responsibility is to maintain the day-to-day operations of the company while the board and senior management seek a qualified successor to the CEO. By selecting a temporary CEO, the board can focus on very specific tasks. The finding of a permanent successor who has the required suitability takes time due to friction in the CEO labor market (e.g., lack of information about outside candidates). By appointing an interim CEO, the board can disconnect from the poor-performing CEO and can buy time to find the most qualified permanent replacement and also use the interim CEO position to screen potential CEO candidates. In the first instance, candidates whose management skills are not known are more likely to be appointed as interim CEOs rather than directly as permanent CEOs.

The roles of an interim CEO

The interim CEO can perform the following different roles in a company:

Seat warmer: They usually have high internal knowledge about the organization of a company, have a very good reputation, and are acknowledged by the external environment. The seat warmer’s primary role is to maintain the daily operations and keep the company business until a permanent CEO is selected. The seat warmer is not qualified with making any major strategic changes and therefore they act for a short term (three to six months).

The contender: They operate like permanent CEO replacements and are often considered candidates for permanent leadership positions typically a member of top management teams. Also, contenders may be outside directors who are former permanent executives.The typical time is three to six months to evaluate the leadership and management style of the interim as the board is not fully convinced about the capabilities of a candidate. So, the board still searching for a candidate while the interim is nominated, at the end of the process a chosen the most qualified candidate from a wider pool is selected as the new CEO. Firms that promote the interim CEO to the permanent position exhibit better long-term performance, suggesting that the outcome of the trial process signals a good fit between the CEO and the firm.

The groomer: The groomer CEO is nominated to guide and mentor the successor, thus filling the transition time between the leaving of the predecessor and the appointment of the permanent successor. Therefore, the primary role of the groomer is being a mentor for the successor in all of the CEO’s possible roles.

The marketer: An interim marketer is selected when the organization is running businesses well, and the board seeks a chance to leverage this success. Therefore, the board looks for an individual who can highlight the organization for an IPO or a sale and deal with potential future owners.

The fixer: The fixer’s task is to improve a poorly performing company, avoid further financial hardship, and/or hinder the insolvency of the company. Their focus is to repair the broken pieces of the organization by analyzing the present businesses and fixing the problems affecting low performance. The temporary fixer’s task is to pass the company in a good condition to a permanent replacement in the most economical way.

The cleaner: A cleaner is used when the organization has become too sluggish and unfocused and no longer responds with effectiveness to the external environment. They focus on realigning the entire corporate portfolio by divesting parts or entire divisions of the organization. Therefore, this role is one of the most complex and difficult interim positions.

Groups of interim CEOs

The group of interim CEOs is segregated into three categories:

Insider-interims:

• Individuals who are acting in an executive capacity within the Company at the time of their appointment as interim CEO, but are not serving as Chair and have not been appointed as Chair.

Chairman-interims:

• Individuals who act as both Chairman and Interim CEO during their term, regardless of whether they held the title of Chairman before the succession event.

Outsider-interims:

• Individuals who were not previously members of management and were appointed Interim CEO but not Chairman during their term.

Possible Impacts of interim CEO succession

Investors react more negatively to insider interim CEO successions than outsider interim CEO successions because they anticipate that the former will contribute to worse long-term performance change, albeit with smaller disruption costs, than the latter. The stock market reacts negatively to the announcement of an interim CEO's succession, and this negative reaction is more pronounced when interim CEOs are chosen from inside rather than outside the firm. However, interim CEOs from the outside are more likely to restructure than interim CEOs from within and to achieve more negative unexpected earnings performance during their tenure.

References

• Bae, J., Joo, J. H., & Park, C. W. (2022). Differential performance impacts of outsider and insider interim CEO successions. Asia-Pacific journal of accounting & economics, 29(6), 1439-1468.

• Ballinger, G. A., & Marcel, J. J. (2010). The use of an interim CEO during succession episodes and firm performance", Strategic management journal, 31(3), 262-283.

• He, X., & Zhu, M. R. (2020). "Are interim CEOs just caretakers?", Journal of corporate finance (Amsterdam, Netherlands), 61, 101420.

• Mooney, C. H., Semadeni, M., & Kesner, I. F. (2012). Six ways companies use interim CEOs. Organizational dynamics, 41(1), 13-22.

Author: Roberto Nguyen