A new study by Toronto-based, executive recruiting firm Spencer Stuart showed that a CEO hired from outside a company created more value for the shareholders within the first three years than a CEO promoted from within the company.
Should we be surprised by these results since Spencer Stuart does have an incentive to encourage boards of directors to recruit from outside their companies? Richard Powers, an associate dean at the Rotman School of Business, found the results somewhat surprising.
However, I am of the firm opinion that companies always should recruit their CEOs from outside their companies.
Let’s consider the three most common arguments favoring promotions from within. One argument is that senior executives, other than the CEO, will work harder to try to win the top position in the company. Promoting from within becomes like a tournament, motivating internal executives to perform at their peak levels at all times.
There are two obvious problems with this argument. The first is: what do you do with the losers in such tournaments? It is highly unlikely that they will get another chance. So are they likely to continue to be motivated and work hard as a team player? Game theory suggests that they will not.
Furthermore, if internal promotions become like a tournament, why should executives cooperate with each other and play like a team?
The second problem is that the if second tier executives work hard to prove themselves, why would they not seek free agency and sell their services to the highest bidder, which might be another company? If they are unwilling to seek free agency, can they really be that good?
A second argument favoring internal promotions is that a company nurtures talent and prefers to replace one super star CEO with another potential super star from within its ranks. Or perhaps, a bird in the hand is worth two in the bush, and if so, what does this imply for track records in other companies? But isn’t this the role for a company like Spencer Stuart to canvass a much larger group of potential candidates and rank them based on a number of criteria, other than familiarity?
The problem with this argument is that there are very few super star executives. Therefore, it is unlikely that many companies will succeed in developing one internally. And if a company has succeeded in hiring someone with the potential to become a super star CEO in the future, and has nurtured this person to realize her/his super star potential, why will this person not sell her/his services to the highest bidder, which might not be the current employer?
The third argument is that internal candidates know their companies. External candidates would have to go through a time-consuming learning curve, which could jeopardize the competitive position or even the survival of the companies that hire them.
There are two flaws in this argument. First, internal candidates, especially if they played a role in influencing the current directions and in developing the current strategies of their companies, are unlikely to see any flaws in what their companies are doing, and are unlikely to admit to any mistakes.
Andrew MacDougall, a Spencer Stuart executive, claimed that the findings of the survey most clearly suggest that external hires do better in crisis situations, likely because they are more willing to make dramatic changes and are less attached to existing strategies.
Second, it does not take long to understand a company’s strengths and weaknesses and to figure out what needs to be done to improve a company’s competitive position. An outsider brings a different perspective to analyzing a company’s current position and deciding its future direction. In-breeding, promoting from within, creates a much greater risk of losing sight of the need for a new business model — for a new approach.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.