CEO Succession Planning - Insiders or Outsiders

• Outsiders can bring fresh ideas, innovation and change.
• As they have no inside experience or knowledge of the organization, its culture or people, they may be more able to objectively review current practices and implement change.
• Outsiders may not only bring new skills, but they can also be used to help develop others.[2]
• Hiring from outside the organization may be the best choice in certain situations:[3]

1. Where the organization is small with few internal candidates.
2. Where there is no established succession planning strategy.
3. Where succession planning does exist, but internal candidates don’t possess the relevant skills and experience. This can happen if the needs of the organization change.
4. Where the organization, or parts of the organization, needs major transformation, e.g. the business portfolio, or where specific strategies are needed, such as mergers and acquisitions or expansion overseas.

Disadvantages:

• Directors are unlikely to know outside candidates as well as they know internal candidates. This offers a greater risk as their potential ‘fit’ with the organization is more difficult to gage.
• Outside candidates often fulfill a specific requirement the organization needs at that time. For example, restructuring a business portfolio. However, they may not have all the necessary skills for the further complexities of the job.
• Outsiders are more likely to make major changes to the organizational culture, as they are less familiar with working styles and practices. Although not necessarily a bad thing, unnecessary change can be highly disruptive.
• Hiring from outside the organization can be costly. In addition to recruiter fees, candidates have to be persuaded to move jobs with the allure of generous benefits.

Hiring From Inside the Organization

Hiring from inside the organization requires a well-established succession planning process to be in place. Quality candidates must be identified early on in their career and groomed to fit the role.

Advantages:

• The commitment of insiders has been tested throughout their career with the organization. By remaining with the organization, insiders also demonstrate buy-in to the vision and values.
• There is likely to be more suitable people available when a position becomes vacant.
• Through specific development programs, the skills and abilities of successors can be aligned to business needs.
• Insiders understand how the organization works, its culture, practices, people and background. Directors, therefore, feel more confident that the successor will ‘fit’ into the organization.

Disadvantages:

• Internal candidates may not go through the same rigorous hiring process as an outsider would, as it is often assumed they fit the criteria.
• Internal candidates usually have many social and psychological ties. This may cause difficulties when required to make changes or difficult decisions.
• Insiders usually come from specialist functions in the organization. Although highly competent in their area of expertise, they may not have the knowledge or experience to lead the whole organization.
• Internal candidates’ skills may be rendered irrelevant through shifts in the industry or market.
• It can be highly resource intensive to develop successors internally.
• Good quality candidates need to be identified early on in their careers to allow for sufficient development. It can be very difficult to identify high potential in junior management.

Review

In North America (2003), 55% of outside CEOs who departed were forced to resign by their boards, compared with 34% of insiders.[4] In Europe, 70% of outsiders were pushed out compared with 55% of insiders. From these statistics, it seems as though insiders are the way forward. However, outsiders have also proved to be highly effective – 37% of the Fortune 1,000 companies are run by externally recruited CEOs.[5]

The fact is, insiders and outsiders can be equally effective. CEOs that fail soon after being appointed generally result from bad hiring decisions by a board who have little experience of recruiting CEOs.[6]

The choice between insiders and outsiders is important, as each will be more effective in certain situations. For example, outsiders are likely to be the best option if succession plans have not been developed fully or there is a lack of suitable candidates. Insiders are often more effective for continuing the good work of their predecessor. Therefore, neither should be the sole option for an organization.