Should businesses promote CEOs from within or look outside the company for a new CEO? Experts disagree, but there are a few general guidelines.

1. Inside or Outside -
Where to Look for
the Next CEO
BY JASON HANOLD

2. Scholars at business schools across the
country disagree on this deceptively
simple question: when hiring a CEO, is
it better to select an external or an
internal candidate?

3. For many experts, the
question has a clear
answer: businesses
should promote a CEO
from within when the
company is doing well,
and hire an outsider
when the company is
doing poorly.

4. This is especially true
given that promoted
employees will require
significantly less training
than those new to the
company.

5. However, not all
authorities on business
agree that an insider
candidate is necessarily
the best choice.

6. Some believe that the
ultimate decision should
depend in large part
upon the unique
circumstances of each
individual business.

7. The Argument for an Insider
Candidate

8. Because all businesses
have countless moving
parts, cultural
complications, and stores
of institutional knowledge,
hiring a CEO from inside
the company provides a
way to retain all of that
information.

9. However skilled an
outsider candidate may be,
he or she will still require
significant time adjust to a
new company’s working
environment.

10. Promoting an insider to
the role of CEO also sends
a positive message of
stability and opportunity to
a business' employees.

11. Most outsider CEOs seek
to shake things up
immediately, which often
results in heavy turnover
among lower-level
executives, especially when
the CEO appoints an
entirely new team of
managers to support a new
mission.

12. By hiring an insider, a
company can prevent this
kind of institutional crisis.
The mere fact that an
insider CEO already has
extensive social ties to the
rest of the firm has a
calming effect on the
entire organization.

13. Finally, promoting a CEO
from the executive ranks is
generally thought to
encourage better
performance from other
employees based on the
fact that they, too, might
be able to occupy the
CEO's office one day.

14. Encouraging employees to
compete with one another
for promotions drives
those employees to
achieve their best work.

15. The Argument for an Outsider
Candidate

16. While the common-
sense approach to hiring
CEOs suggests that only
struggling companies
should hire outsider
CEOs, recent history
shows that many
businesses are
disregarding this advice.

17. In the 1970s, US
companies hired external
candidates only 15
percent of the time, but
by the 1990s, the rate
had increased to 26
percent.

18. A study by Booz & Co.
found that 22 percent of
CEOs in 2011 were
outsider candidates,
compared to a mere 14
percent in 2007. In
Europe, the figures are
much higher, with more
than 30 percent of CEOs
coming from outside the
company.

19. Why are more and more
companies turning to
outsider CEOs? Part of
the reason involves a
growing consensus
among management
experts that outsider
CEOs tend to create
better outcomes for their
companies.

20. In fact, Vell Executive
Search's study on the
subject found that top-
tier companies enjoyed
nearly 100 percent
revenue growth over
three years with external
hires, while insiders
produced only 35
percent growth.

21. One reason for this
disparity involves the
common-sense solution
discussed previously;
companies hiring CEOs
externally are likely to be
companies in trouble.
Thus, these firms tend to
provide more
opportunities for growth.

22. Those advocating for
hiring external
candidates attribute this
superior performance to
the fact that insider
CEOs are often unable or
unwilling to challenge
the status quo.

23. Furthermore, the Vell
Executive Search study
found that there were
significant differences
between insider CEOs
and CEOs hired from
other industries.

24. For example, CEOs with
prior experience in
venture capital brought
their companies 200
percent revenue growth
over three years
compared to the
baseline 82 percent.

25. The survey additionally
found that younger
CEOs performed better
than older candidates,
and MBAs, especially
those from Ivy League
schools.

26. Finding the Right Solution for Your
Business

27. Given the
disagreement among
experts, many have
tried to find an
empirically correct
solution to the CEO
hiring problem.

28. One comprehensive study
of companies in the
chemical and airline
industries in the US
between 1972 and 2002
found that "outsiderness"
is far less important than a
variety of other factors,
including pre-succession
company performance and
the overall stability of the
wider industry.

29. The study found that
outsiders typically
performed well when the
industry was experiencing
higher-than-average
growth, when the
company itself was
experiencing poor
performance, and when
new outsider CEOs
refrained from making
major changes too soon
while overseeing the hiring
of a new management
team.

30. Meanwhile, Joe Bower of
Harvard Business School
has advocated for what he
has termed an "inside
outsider," or CEOs who
maintain "outsider" status
despite a long history of
involvement within a
company.

31. Examples include hiring a
candidate who previously
worked for a company but
has since been involved in
other pursuits, or hiring a
candidate who has made a
name for him or herself in
offices distant from the
headquarters.

32. These candidates may
offer the best of both
worlds: an insider's
understanding of a
company and an outsider's
willingness to make
necessary changes.