Judgement Call: Should companies bring in CEOs from outside?

Source: Stefan Stern for The Financial Times
[posted on 02/03/2010]

The Problem

Wm Morrison, the UK supermarket chain, has hired as chief executive Dalton Philips, from outside the company, while ITV has chosen Adam Crozier, who comes from outside the media sector altogether. Should companies try harder to groom leaders from inside the business? Or are outsiders better because they bring fresh thinking into the organisation?

The Advice

The academic Joseph Bower: When companies recruit CEOs from outside, they make a losing bet. On average, insiders do better whether prior performance was poor or good. Unless top management has been corrupt, outsiders are chosen because the absence of leadership development programmes and a proper succession process has left the incumbent and the board with what they think are inferior candidates. The outsiders often fail because they lack critical understanding of the company's capabilities and culture and/or the specifics of its industry and markets. What companies need is an inside outsider: an outstanding insider who has retained real objectivity so that he or she can drive the kind of corporate transformation required by our rapidly changing markets. It takes thoughtful recruiting, training, and mentoring so real talent can become great leaders. The writer is a professor at Harvard Business School.

The headhunter Kevin Kelly: Internal candidates should be benchmarked against external ones. Research shows that the outsider must be twice as strong to get the job. Internal CEOs are the ideal solution, all other things being equal, because they care about their people and their firm. For them, the brand is their employer. For externals, it takes time to merge the company's brand with their own. Leadership should be seen as a major source of organisational risk. Long-term succession planning keeps investors comfortable, the business on track and reputations intact. CEO succession is a process, not a one-time transaction. If a business's only option is to look outside, its processes have gone wrong. The writer is chief executive of Heidrick & Struggles.

The governance expert Guy Jubb: Change has consequences. A board's appetite for change can help determine whether to go inside or outside for leadership talent. If the change appetite is high, an outsider seems the better bet. The outsider is expected to behave differently and will not be shackled by internally bred prejudices. The outsider can challenge internal conventions and break down barriers that breed inefficiency and poor decision-making. If the change appetite is low and the company is successful, an insider is often the better choice. HSBC comes to mind. This is an area where one size does not fit all. Look at Tony Hayward at BP - an outsider would have struggled to do better. Either way, it pays to focus on change. The writer is head of corporate governance for Standard Life Investments.

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