The Insider’s Edge in CEO Recruiting

Earlier this month, Joann Lublin reported for the Wall Street Journal that most large organizations that appointed new CEOs last year had opted for an internal candidate:

About four of five companies in the S&P 500 that chose a new CEO last year promoted an insider, according to a report by executive-search firm Spencer Stuart that provides a snapshot of what it takes to become a corporate leader nowadays. That is the highest proportion of internal appointments since Spencer Stuart began tracking CEO transitions at big businesses in 2004, and represents a 20 percentage-point jump since 2012.

Spencer Stuart connected this shift to boards getting better at CEO succession planning. “Boards,” Lublin continues, “now want leaders with a range of experiences, including working abroad, cross-functional roles and public-company directorships.” That squares with our own work on Enterprise Leadership, in which we found that due to the increasing complexity of most organizations, effective leaders need a holistic understanding of how they work, which favors insiders who have spent significant time in the organization.

This trend also raises an interesting question for me about whether a career at one company is becoming something of a luxury for the “1 percent.” The conventional wisdom is that nobody entering the workforce today can reasonably expect to spend 30 years at one organization like their parents did, but perhaps for the chosen few, that actually is the path to the CEO’s office.

Meanwhile, in the Harvard Business Review, business professor Joseph L. Bower argues that Spencer Stuart’s findings are welcome news. He points to his own research on succession, which “revealed that CEOs brought in from outside the company succeeded less often than insiders, even when the company’s poor performance would seem to have justified going outside for a new leader”:

The reasons were straightforward: An outsider often did not know the industry or its suppliers, customers, or competitors, nor did they know the capabilities of the company and its people. While they might be good at cutting costs, they rarely knew enough to manage growth and innovation. Often outsiders would “clean up the company” and then sell it. While shareholders might benefit, the company was lost as a competitive force in its field.

But the research revealed a second major finding that was not addressed directly in Lublin’s article: The CEOs promoted from within that succeeded were what I called “inside-outsiders.” They had developed inside the company and therefore knew the organization and its norms as well as the people and their capabilities — but they had also retained a strong streak of objectivity. Far from drinking the company Kool-Aid, they had an understanding of why and how the company had to change to deal with new opportunities and challenges posed by changing markets and technology.

(CEB Corporate Leadership Council members can read the full Enterprise Leader research report here.)