Should your next CEO be an insider or an outsider?

“On the face of it, scouring the world for a superstar makes perfect sense. Surely a great manager can make all the difference to an ailing firm? Jack Welch boosted General Electric’s market capitalisation by 4,500% at a time when its old rival, Westinghouse, was disintegrating. Surely management skills are portable? What other justification is there for the giant MBA and executive-education businesses? And surely it is sensible to cast your net as widely as possible in search of the world’s fizziest talent? In the 1970s only about 15% of all CEO vacancies in Forbes 1,000 firms were filled by outsiders. By the early 2000s the share had climbed to 33%. It is even higher in the high-tech industry.”

SCHUMPETER, The Economist (1 October 2011)

The highly regarded ‘Schumpeter’ column in The Economist covered a very important leadership question recently: which CEOs are better, those hired from within, or ‘superstars’ brought in from other companies?

As the excerpt shows, bringing in the renowned outsider is a rising trend: a third or more of high-end CEO vacancies in the US are now filled by outsiders. What’s wrong with that? Surely management skills are portable and relocatable? Surely a great leader is a great leader wherever you place him or her? Would a Kenyan company not want a Steve Jobs or Jack Welch at its helm?

Think again. Business school academics studying the facts rather than the froth have usually found the opposite to be true. The announcement of a ‘rock-star’ appointment may cause a media flurry and a brief boost to the share price, but the long-term impact is usually less impressive. Indeed, a recent study by the University of Texas suggests that “the pay premium (given to renowned outsiders) is negatively correlated with the future performance of the firm that does the hiring. In other words: the more dazzling the outside recruit, the worse he performs in his new role.”

Why should this be the case? I can think of several reasons. First, while generic management skill is important, it is often overshadowed by the specific, contextual knowledge necessary to succeed. Countries have specific contexts, for example, which is why the expatriate leader is a dying trend around these parts. Savvy companies have figured out that the better approach is to develop a cadre of managers steeped in local knowledge.

It’s the same with companies. Something called corporate culture often trumps star power. Companies have ways of doing things, subtle norms and nuances, that an outsider will undoubtedly struggle to master in a short space of time. And when that outsider tries to dismantle the culture and singlehandedly impose a new one, trouble will usually ensue. Corporate success comes more from the ability to create superb teams with specific knowledge than from individual charisma.

A second reason is to do with the effect on the morale of insiders. What message do you give when you say a company has not developed any worthwhile internal candidates for leadership? HP’s last 4 CEO recruits have been outsiders. The rest is history. Companies that are always unable to find successors from within their ranks have been doing something very wrong.

Certainly there are times when a company must look outside, particularly when the need to inject a fresh approach and new ideas is acute. But the best companies generally do succession from within. They maintain a talent gene pool that covers the spectrum, and when the time for a transition is upon them, have a wide choice of candidates, all schooled in the subtleties of their particular business. This requires systematic leadership grooming and talent management, and repeated exposure of top talent to the board of directors.

Do you imagine that Steve Jobs’ successor at Apple could have been anyone other than an Apple insider?

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