inside or outside - where to look for the next ceo
TRANSCRIPT
![Page 1: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/1.jpg)
Inside or Outside - Where to Look for the Next CEOBY JASON HANOLD
![Page 2: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/2.jpg)
Scholars at business schools across the country disagree on this deceptively simple question: when hiring a CEO, is it better to select an external or an internal candidate?
![Page 3: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/3.jpg)
For many experts, the question has a clear answer: businesses should promote a CEO from within when the company is doing well, and hire an outsider when the company is doing poorly.
![Page 4: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/4.jpg)
This is especially true given that promoted employees will require significantly less training than those new to the company.
![Page 5: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/5.jpg)
However, not all authorities on business agree that an insider candidate is necessarily the best choice.
![Page 6: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/6.jpg)
Some believe that the ultimate decision should depend in large part upon the unique circumstances of each individual business.
![Page 7: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/7.jpg)
The Argument for an Insider Candidate
![Page 8: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/8.jpg)
Because all businesses have countless moving parts, cultural complications, and stores of institutional knowledge, hiring a CEO from inside the company provides a way to retain all of that information.
![Page 9: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/9.jpg)
However skilled an outsider candidate may be, he or she will still require significant time adjust to a new company’s working environment.
![Page 10: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/10.jpg)
Promoting an insider to the role of CEO also sends a positive message of stability and opportunity to a business' employees.
![Page 11: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/11.jpg)
Most outsider CEOs seek to shake things up immediately, which often results in heavy turnover among lower-level executives, especially when the CEO appoints an entirely new team of managers to support a new mission.
![Page 12: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/12.jpg)
By hiring an insider, a company can prevent this kind of institutional crisis. The mere fact that an insider CEO already has extensive social ties to the rest of the firm has a calming effect on the entire organization.
![Page 13: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/13.jpg)
Finally, promoting a CEO from the executive ranks is generally thought to encourage better performance from other employees based on the fact that they, too, might be able to occupy the CEO's office one day.
![Page 14: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/14.jpg)
Encouraging employees to compete with one another for promotions drives those employees to achieve their best work.
![Page 15: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/15.jpg)
The Argument for an Outsider Candidate
![Page 16: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/16.jpg)
While the common-sense approach to hiring CEOs suggests that only struggling companies should hire outsider CEOs, recent history shows that many businesses are disregarding this advice.
![Page 17: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/17.jpg)
In the 1970s, US companies hired external candidates only 15 percent of the time, but by the 1990s, the rate had increased to 26 percent.
![Page 18: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/18.jpg)
A study by Booz & Co. found that 22 percent of CEOs in 2011 were outsider candidates, compared to a mere 14 percent in 2007. In Europe, the figures are much higher, with more than 30 percent of CEOs coming from outside the company.
![Page 19: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/19.jpg)
Why are more and more companies turning to outsider CEOs? Part of the reason involves a growing consensus among management experts that outsider CEOs tend to create better outcomes for their companies.
![Page 20: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/20.jpg)
In fact, Vell Executive Search's study on the subject found that top-tier companies enjoyed nearly 100 percent revenue growth over three years with external hires, while insiders produced only 35 percent growth.
![Page 21: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/21.jpg)
One reason for this disparity involves the common-sense solution discussed previously; companies hiring CEOs externally are likely to be companies in trouble. Thus, these firms tend to provide more opportunities for growth.
![Page 22: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/22.jpg)
Those advocating for hiring external candidates attribute this superior performance to the fact that insider CEOs are often unable or unwilling to challenge the status quo.
![Page 23: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/23.jpg)
Furthermore, the Vell Executive Search study found that there were significant differences between insider CEOs and CEOs hired from other industries.
![Page 24: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/24.jpg)
For example, CEOs with prior experience in venture capital brought their companies 200 percent revenue growth over three years compared to the baseline 82 percent.
![Page 25: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/25.jpg)
The survey additionally found that younger CEOs performed better than older candidates, and MBAs, especially those from Ivy League schools.
![Page 26: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/26.jpg)
Finding the Right Solution for Your Business
![Page 27: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/27.jpg)
Given the disagreement among experts, many have tried to find an empirically correct solution to the CEO hiring problem.
![Page 28: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/28.jpg)
One comprehensive study of companies in the chemical and airline industries in the US between 1972 and 2002 found that "outsiderness" is far less important than a variety of other factors, including pre-succession company performance and the overall stability of the wider industry.
![Page 29: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/29.jpg)
The study found that outsiders typically performed well when the industry was experiencing higher-than-average growth, when the company itself was experiencing poor performance, and when new outsider CEOs refrained from making major changes too soon while overseeing the hiring of a new management team.
![Page 30: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/30.jpg)
Meanwhile, Joe Bower of Harvard Business School has advocated for what he has termed an "inside outsider," or CEOs who maintain "outsider" status despite a long history of involvement within a company.
![Page 31: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/31.jpg)
Examples include hiring a candidate who previously worked for a company but has since been involved in other pursuits, or hiring a candidate who has made a name for him or herself in offices distant from the headquarters.
![Page 32: Inside or Outside - Where to Look for the Next CEO](https://reader031.vdocuments.net/reader031/viewer/2022030309/58f14bcb1a28abe8558b45a3/html5/thumbnails/32.jpg)
These candidates may offer the best of both worlds: an insider's understanding of a company and an outsider's willingness to make necessary changes.