CEOs best recruited from “inside”, study finds

The study by consultancy AT Kearney and the Kelley School of Business at Indiana University discovered that outsiders have significantly higher failure rate and shorter tenure than insiders. According to Paul Laudicina, chairman and managing partner of AT Kearney: “Recruiting at the top is often far more risky, costly and disruptive than seeding succession from within.”

The report’s authors studied non-financial companies in the S&P 500 index between 1988 and 2007 and identified 36 that routinely promoted chief executives from within their own ranks. These outperformed the others in the index across seven metrics. The researchers also found that the median compensation, including salary, bonus and equity incentives, for external chief executives was 65 percent higher than for those promoted from within. Yet 40 percent of outside chiefs lasted two years or less, while almost two thirds were gone by their fourth anniversary.

Coming from outside gives external chiefs feeling that they have “mandate for change” and the freedom to assert their will on the company almost immediately, the study suggests. Frequently, this leads them to make big changes before they fully understand the company, its culture and its most valuable people. Their arrival is often quickly followed by the departure of other senior management members – and the results are not always positive. The only thing that outsiders seem consistently good at is rapid cost-cutting and divestment. But over time those opportunities dry up.

Fred Steingraber, of AT Kearney, suggests company directors should take more active role in succession planning and rely less on incumbent chief executives for information about talent within the company.

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