PROFESSIONAL services firm Deloitte’s findings show that over the past 25 years, there has been a decline among S&P 500 firms that appoint chief executive officers (CEOs) with at least 20 years’ of experience within the company.

Stanford’s Graduate School of Business attributes this to the dangerous myth that external candidates are more exciting and promising.

Internal promotions of seasoned executives to CEOs also fell by nearly one-half to 30 per cent of total successions in 2012, as compared to the 46 per cent in 1996, and 58 per cent at the end of the 1980s.

Regardless of insufficient internal talent or a desire to diversify the leadership pool, companies often find themselves recruiting externally. But is this really the right decision for companies? 

External hires

According to the MIT Sloan Review, there are instances in which external hires tend to do better than those who come up through the ranks.

On one hand, outsiders can introduce new ideas and inspire change, especially when a company has been dogged by poor performance and is in need of a transformation.

Research even suggests that these critical times make it easier for external executives to overcome internal resistance to change initiatives.

Consider General Motors’ (GM) four CEO successions within an 18-month period.

After CEO Rick Wagoner, a home-grown leader, stepped down in March 2009, his successor Fritz Henderson, another loyal GM employee, resigned later in the same year.

It was in these unfavourable circumstances that the board chose Mr Ed Whitacre, a former AT&T executive with no auto industry experience, to rescue the company from the brink of bankruptcy.

Mr Whitacre brought a fresh perspective that restored the company’s vision to create the best cars.

His successor, Mr Dan Ackerson — again with no car industry experience before joining — effectively implemented important changes to the company’s leadership.

In 2010, GM raised a record of $20.1 billion in its initial public offering, putting the spotlight on the performance benefits that outsiders may bring to companies faced with poor performance.

On the other hand, hiring external successors does not guarantee successful leadership.

According to the Wharton School of the University of Pennsylvania, even the best outsiders grapple with the negative effects of being new to a company or industry, and need around two years to learn how to be effective in their new organisation and build trust with the key players.

Moreover, hiring from outside comes with a greater risk of failure.

In fact, a study by Matthew Bidwell at the same university found that although outside hires tended to have more education and experience than those internally, those credentials didn’t always result in strong performance in the new work environment.

Moreover, external successors were substantially more expensive than employees promoted from within, and 61 per cent more likely to be laid off or fired from their position and 21 per cent more likely than internal hires in similar positions to leave their jobs.

 

Internal successors

In comparison, internal successors have a solid understanding of the company’s culture and have already acquired firm-specific skills needed to succeed in their respective roles.

Despite the advantages and disadvantages of recruiting externally, Harvard Business Review states that companies should commit to the process of nurturing talent from within and develop their own successors in order to strengthen their performance in the long run.

As internal candidates have longer experience with their firms and are aware of the specific internal needs of their businesses, they are more likely to result in a positive transition and ensure future success.

For example, a well-established succession plan allowed Apple to seamlessly transition through the loss of company founder Steve Jobs, who took the time to inspire leadership talent around him and handpicked CEO Tim Cook to be his successor well before his death.

Two-and-a-half years after the hand-off, Apple under Cook grew its annual revenue by about 58 per cent and its profits by about 40 per cent, during which rivals such as Google increased their profits by about 25 per cent in the same period.

Top companies understand there is every reason to dedicate sufficient effort to nurture and promote their employees.

 

Factors to consider

In a survey conducted by Bó Lè Associates, a remarkable 24 per cent of companies surveyed in the Asia-Pacific prominently filled their executive-level positions by promoting internal candidates, followed by outsourcing the process to executive search firms.

While there is no “one size fits all” model, hiring managers should consider the seniority and the special skill sets required for the position when deciding whether to hire from outside or promote internally.

After all, building a steady pipeline of talent that is ready to fill in key roles is a challenge most companies are facing and a process that requires long-term commitment.

In terms of hiring from outside, hiring managers should know that there is a high cost to external successors, and they may not always be able to perform as well as expected.

 

Article by Ati Simatupang, head of South-East Asia, Bó Lè Associates. It is the largest executive search firm in Asia with a network of 16 wholly owned local offices. For more information, visit www.bo-le.com