Hiring a New CEO? Pick the Right Strategy

The CEO position in corporate America has become a revolving door, with many organizations bringing in new talent from the outside to lead their companies to better days. New research suggests, however, that this might not be the best method for hiring a new CEO, even if the company is struggling.

In 2003, CEOs leaving office in America had tenures averaging only about five years. Today, companies continue to fire and hire their top executive at breakneck speed, repeatedly looking for big-name, big-results replacements from the outside. Yet too often the CEO fails, and the cycle begins anew. “Why do so many firms fire their CEOs in such a short time period? It’s because they don’t meet expectations,” says Yan “Anthea” Zhang, assistant professor of strategic management at Rice University’s Jesse H. Jones Graduate School of Management. “But the more important question is: why can’t they meet those expectations? It’s because the company or board of directors might not have picked the right person for the position to begin with.”

Zhang, who calls the high turnover trend a “CEO succession crisis,” and co-researcher Nandini Rajagopalan of the University of Southern California, evaluated three different forms of succession—heirs apparent, other internal executives, and outsiders—in more than 200 CEO changes in publicly traded, nondiversified U.S. manufacturing companies over a six-year period in the mid-1990s. Their findings, published in a recent paper titled “Organizational Dynamics,” suggest the best approach, even in the most challenging situations, such as when the company is not doing well, is not to look outside the company but, instead, to groom an heir apparent from within. This is in stark contrast to how companies traditionally react.

“It’s natural for companies to want to hire new CEOs from the outside when performance is bad, but our research shows that is not the most effective strategy,” Zhang says. “An outsider faces great pressure to turn a company around or lead the organization to increased success, but just because an outside candidate will likely bring change and new skills does not mean those changes will work well in the organization.” In contrast, a groomed heir apparent has the interpersonal skills that work within the company. The grooming process allows the candidate and the firm time to get acquainted while also providing an immediate backup should something unexpected happen to the company’s current head, reducing the amount of turbulence during a CEO’s departure. And by performing some of the responsibilities before the official appointment, the heir apparent demonstrates his or her ability to lead as CEO.

Another common practice is for companies to run an internal “horse race” among non-heir-apparent candidates vying for the top post. The researchers found that this form of CEO succession should be avoided at all costs. The problem lies not only in the lack of a grooming period but also in the fact that the losers in the internal race frequently leave the firm when they are not selected. It also makes for a volatile situation in the highest executive ranks that can poison the entire organization.

The authors suggest that the one environment in which outside candidates may be best-suited is when a company is facing unprecedented industry instability. For example, when Kodak was confronting the shift from film to digital and the retirement of longtime CEO Daniel Carp, the company looked outside the organization for someone with digital expertise. It found its successor in Antonio Perez, who had previously run Hewlett-Packard’s digital imaging businesses.

The article is laced with similar examples from corporate America over the past decade. The most telling may have been at Xerox, where an outside CEO hired in 2000 lasted only 13 months before a longtime executive from within the company, Anne Mulcahy, was groomed and then promoted to CEO, bringing the company back from the edge of bankruptcy.