Leadership Changes Aren't Always Good For Business

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Making changes at the top of your company in an effort to shake things up can often backfire on businesses, new research suggests.

While some companies think making changes to top management is a way to limit complacency and improve firm performance, research by University of Kansas School of Business professors shows those moves don't always have the intended results.

James Guthrie, one of the study's authors and a human resource management professor, said although turnover in the highest levels of management can sometimes produce positive results for firms, too much turnover damages the performance of the company.

"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," Guthrie said in a statement. "And there is a certain extent to which that is true."

However, when making such changes, companies don't always factor in the unstated knowledge the departing executives take with them, such as social connections, industry relationships and organizational knowledge.

"The implication is that turnover not only erodes performance by depleting organizational skill banks but, perhaps more dramatically, [also] by altering the social structure and fabric of an organization," the study's authors wrote in the research.

For the study, researchers examined the relationship between top-management-team turnover and firm performance from 367 firms representing 134 industries. Researchers took into account a number of industry and firm characteristics, including a company's own performance history.

The study's authors discovered that as rates of top management turnover increase, firm performance tends to suffer. Guthrie said as turnover increases, not only does productivity go down, but it can also lead to insecurity in other parts of a firm.

"What's equally important is what happens to the people left behind when a top executive leaves," he said.

Guthrie said when deciding whether or not to make a change at the top, companies don't always understand the value of a person's firm-specific experience.

"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," Guthrie said. "Companies often underestimate the value of employee retention."

The study's authors said their research should serve as a cautionary tale for businesses.

"Don't necessarily think that if you're in a volatile industry, changing people at the top will improve things," Guthrie said.

The study was co-authored by KU professor Jay Lee, University of Nebraska-Kearney associate professor Jake Messersmith and Towson University assistant professor Yong-Yeon Ji.