Outsider CEOs Are Becoming More Popular

Outsider CEOs Are Becoming More Popular

In general, large organizations tend to prefer internal candidates when recruiting a new CEO, yet the 2015 CEO Success study from Strategy& finds that 22 percent of planned successions at large, global public companies over the past four years brought in an outsider, compared to 14 percent in 2004–2007. The study found that outsider CEOs were more likely to be hired in industries experiencing disruption, and if the company was low performing, the chairman did not have CEO experience in the same company, or the former CEO was also an outsider.

Harvard Business Review senior editor Curt Nickisch talks to Gary Nielson, one of the authors of the report, to find out more about this trend:

That helps explain why 38% of incoming CEOs in the telecommunications industry during the previous four years were recruited from outside the company. Other industries with relatively high rates of outsider CEO hires include health care, utilities, and energy. An external hire, with experience in different competitive landscapes and unburdened by a long history and tangled relationships within the company, can have an easier time driving major changes.

The threat of activist investors pushing their own external candidates also appears to be encouraging corporate boards to look past the strong internal candidates they’ve been grooming. “We’ve spent a lot of time with companies that are worried,” Nielson says. “Chairs are saying, ‘You know, let’s get out in front of the problem before we have a Wall Street Journal[–reported] boardroom coup.’”

A more sobering statistic from the Strategy& report is that only 2.8 percent of new CEOs in the 2012–2015 period were women, but Nickisch is hopeful that the “growing comfort among the largest public companies with hiring chief executives from outside may improve the prospect of more women CEOs in the future”:

PwC’s Spencer Herbst attributes [the low number of new women CEOs] to a statistical anomaly rather than the harbinger of an emerging trend. “If you look at the regions and especially the industries that had high turnover this year and that made up most of our annual sample, it was kind of bad luck that they haven’t historically hired a lot of women CEOs,” Herbst says.

The growing legitimacy of outsider chief executives hired in planned successions suggests that the low number of women CEOs will climb. That’s because the CEO Success study found that female chief executives are hired from outside the company more often than male CEOs are — 32% of outgoing and incoming CEOs from 2004 to 2015 were women, versus 23% were men.