The power of hiring externally

Written by
Dr Stephen Ferris

06 Jul 2015

06 Jul 2015 • by Dr Stephen Ferris

Coming up through the ranks

The issue of CEO succession has been in the spotlight recently. In April, toymaker Mattel fired its CEO Bryan Stockton, and earlier in the year McDonald’s CEO Don Thompson stepped down after 25 years with the company.
In both cases an insider with a strong history at the firm was appointed to replace the outgoing incumbents. And this is the case with almost 80% of CEO successions. Companies appear to prefer the devil they know rather than take a chance with an outside candidate. The uncertainty associated with an outsider seems to deter many corporate boards from following this path.
However, having recently conducted research into over 60 years of CEO succession events with colleagues from Georgia Tech and California State University, it is a little unclear as to why this is. 

New talent, new opportunities

One of the most interesting findings from the research was that externally hired CEO’s are significantly more willing than internal candidates to invest in new research and innovation. It is often innovation that is most needed when a company is seeking to address declining profitability or the challenges of a globally competitive marketplace. Internal hires, meanwhile, are more likely to sink company cash into large, existing companies with a series of corporate acquisitions.

On top of this, companies with an older departing CEO, lots of assets in place and strong current financial performance prefer internal appointments – but companies with a more independent board of directors are more inclined to go for an outsider.

Dont be reluctant to look externally

Another finding was that companies were 4 times more likely to hire externally when a CEO is forced out, as opposed to resigning. This is likely due to a loss of confidence in the remaining management team by the board and a feeling that new leadership is needed to correct the company’s problems. Thus the board is much more receptive to an overall change in the company’s top management ranks.

Why wait before hiring externally?

The overall picture of our study seems to be that CEO’s are well entrenched, and that boards are generally reluctant to consider external candidates if there are credible internal candidates. Indeed, this entrenchment is shown by the fact that internal CEO’s stick around significantly longer than external incumbents – 7 and a half years as opposed to 6. Of course, there are upsides to hiring someone with an intimate knowledge of the business – but if it’s change you’re looking for an external hire is the better bet. 

Companies in general need to open their eyes to the advantages and disadvantages of each option rather than simply acquiescing to the status quo.  It is also clear that many do not invest enough effort in adequate succession planning. Clearly, a CEO leaving can cause problems. But it is also an opportunity to reassess who leads a company and consequently, its future direction and success. 

Companies need to consider more fully the range of candidate and not simply focus on the internal choice because of convenience or an unreasonable fear of change.

Dr Stephen P. Ferris

Senior associate dean for graduate studies & research