WORK-LIFE BALANCE / SEP. 02, 2014
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The Costs of a Revolving Door in Your Boardroom

Earlier this summer the newspapers were full of praise and adulation for the new Manchester United manager Louis van Gaal.  Fresh from his successful World Cup campaign with the Dutch team, he was believed to be the man to change the fortunes of the club after their poor campaign under previous manager David Moyes.

Alas, a matter of weeks into the season and three dreadful results into his first campaign, you can already sense the knives are being sharpened for van Gaal.  Of course, rapid changing of manager is quite a common event in the football world, but a new study highlights what a poor strategy that often is.

It suggests that whilst a change in senior management of an organisation can produce positive outcomes for the company, excessive turnover can be extremely damaging for performance.  It goes on to suggest that too often, organisations are swayed by the potential benefits and become somewhat happy.

What happens when managers leave the room?

The research wanted to fill the gap in the market for studies that explore explicitly what happens when an executive leaves their job, and in particular its impact on the organization’s productivity.  The research, published in the journal Organization Science, decided to focus specifically on the boardroom, believing that the impact of turnover on this influential groups would be particularly marked.

"Even within management research, there is this idea out there that top management teams get too complacent, too committed to the status quo, and therefore shaking things up will improve performance," the researchers say. "And there is a certain extent to which that is true."

High turnover = lower performance

The research involved an analysis of 367 firms across over 130 industries to try and understand the relationship that exists between executive turnover and the financial performance of the company.  The study tried to take into account the various industry and firm specific characteristics, including for instance the historical performance of both to narrow in on the impact of the executive team.

The study found that when the turnover of senior managers gets too high, the performance of the firm begins to suffer quite dramatically.  The findings mirror that from similar studies looking at employee turnover of key personnel lower down the corporate hierarchy.  When the staff turnover rises, not only does productivity drop, but it also causes a great deal of insecurity throughout the organisation.

"What’s equally important is what happens to the people left behind when a top executive leaves," they say. "It’s basically a cautionary tale. Don’t necessarily think that if you’re in a volatile industry, changing people at the top will improve things."

The value of experience

What companies would often fail to account for is the knowledge that experienced executives take with them when they’re shown the door.  They often have a wealth of connections, relationships and organisational knowledge that is tough to replace.

"The implication is that turnover not only erodes performance by depleting organizational skill banks but, perhaps more dramatically, by altering the social structure and fabric of an organization," the study declares.

The study goes on to suggest that this company’s specific experience is often neither understood nor particularly valued by the executives employer.  This misunderstanding about the value of experience can often result in a belief that change can only be a good thing.

"Certainly you need to change top executives when they’re not performing well or skill sets are obsolete, but I think a lot of firms take this too far," the researchers conclude. "Companies often underestimate the value of employee retention."

Whilst it’s tempting therefore to believe that a change at the top will change the fortunes of the entire organisation, it is often far more complex than that and you may end up doing more harm than good.

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