Washington: Boards of directors commonly trip while hiring CEOs, especially if they are taking them from the outside, because they know little about the competence of the prospective new leadership.

Boards can avoid this problem if they create nominating committees led by outside directors, who tend to have broader perspectives on the skills of potential candidates.

Yan Zhang of Rice University reviewed data on 204 newly appointed CEOs in the US and studied rates of dismissal, controlling for alternative explanations such as firm performance and political factors.

The study found that boards of directors (BoDs) often make poor decisions owing to the absence of adequate information. The candidates typically know more about their actual competence than the board itself.

This compounds the problem of the board in making the right choice in selecting a new outside CEO whose skills match requirements. Although even inside candidates may fail, boards have better information about the true skills and potential fit of inside promotions. Thus, inside CEOs are less likely to be dismissed with a short tenure than outside CEOs.

The study highlights several factors that increase the chance that a newly appointed CEO will be dismissed or will succeed. One major influence on failure arises from the fate of the predecessor CEO.

Failure tends to breed failure. The dismissal of the CEO also substantially increases the likelihood of his successor's dismissal.

In contrast, firms that create nominating committees led by outside directors are more likely to identify candidates who succeed in their new jobs.

"Results of this study can inform boards how to better manage the CEO succession process," Zhang concluded. "It highlights the importance of having an effective nominating committee on the board and offers caution with regard to the tendency of firms to look outside for their new CEOs."

These findings were published in the Strategic Management Journal.