When it comes to CEO selection, boards are increasingly of the view that it’s better the devil you know. More than three-quarters (77%) of the 178 chief executives appointed at global, publicly listed companies last year were internal hires, up from 67% five years ago. Of the companies in the French CAC 40 index and Japan’s Nikkei 225 that replaced their CEO last year, all opted for people who were already working for the organisation.
The data from executive search firm Russell Reynolds shows that there has been a steady increase in the number of businesses making appointments from their current C-suite, rather than looking externally when replacing their chief executive. The strength of this trend has led Steve Langton, managing director at Russell Reynolds Associates, to predict that there could soon be a time where almost all the world’s CEOs are promoted from within.
The value of internal CEO hires
So, why is this trend accelerating? One reason is the perceived risk of hiring externally versus internally. Typically, an internal candidate is the safer option because they are known to the board, already work with other leaders in the team and understand the business and its culture.
Karen Thomas-Bland is a non-executive director and member of the board advisory panel at several companies. She explains: “Generally, internal candidates are lower risk – they are a known entity to the stakeholders, they understand how to work with the prevailing culture and have the corporate memory for what has worked well and less well in the past.
“They also have the relationships that mean they can hit the ground running, reducing the time it takes to get properly inducted into the business and role.”
The reduced time it takes them to get up to speed is a key benefit. Hiring externally can take a while because it involves a protracted hiring process and the person coming in is likely to be on a long notice period or a non-compete clause. They then have to spend time learning the business, its culture and its processes before they can really run it effectively.
Unilever is a case in point. Its former CEO Alan Jope announced his intention to retire in September 2022. His replacement, Hein Schumacher, who was CEO of global dairy and nutrition business Royal FrieslandCampina at the time, was not announced until the end of January 2023 and didn’t actively step into the role until July. It was only in October that year he laid out his strategy for the company.
It can be challenging for businesses to navigate this intervening period between leaders – particularly if it faces unexpected challenges or events during this time. In contrast, there is no lengthy notice leave to negotiate with internal hires and they tend to be in a position to hit the ground running. “When there is a greater need to make an impact quickly, shareholders don’t have time to wait for an outsider to get up to speed,” Thomas-Bland says.
Another key benefit of the internal hire is they are usually cheaper, further reducing the risk factor for boards.
Nevertheless, the growing use of internal hires suggests boards – and by extension businesses – are becoming more risk averse. Ben Bryant, professor of leadership and organisation at IMD Business School, suggests it shows that anxiety is creeping into succession decision-making.
“Businesses have faced many unprecedented challenges in recent years,” he says. “I think board members are managing their own anxiety around this and therefore going for people who are more of a known entity.”
Although this change can be presented as de-risking the organisation, Bryant believes it is actually an effort from boards to de-risk themselves. “You’re unlikely to be chucked off a board if you hire someone internally and they ultimately fail,” he adds.
A new wave of first-time CEOs
The trend of hiring CEOs from within also means businesses are experience a glut of first-time CEOs – 86% of the 178 appointed CEOs in 2023 were first-timers. It’s rare for someone to hold a chief executive position, only to step down into a different C-suite position later in their career.
In difficult times, it might seem logical that boards would turn to people with prior experience of leading a company. However, this is rarely the case. This is seen in the fact that internally appointed CEOs tend to outlast their peers.
Bryant explains: “You would think that turning to an experienced CEO would reduce a board’s anxiety but the problem with outsiders is that they have to learn a lot of contextual knowledge. This is a massive task and a reason why a lot of external CEOs come is because they fail to read what is going on inside the organisation.”
Internal candidates have a lot of learning to do too, but their challenge is more about the self – making the step up and learning how to manage people that used to be their peers. Crucially, boards tend to be in a much better position to assist with this transition.
Langton adds: “By far the most important thing that determines CEO success is their learning ability. Internal CEOs tend to be restlessly paranoid that what worked yesterday won’t work tomorrow, which means that learning is right at the top of their to-do list.”
Succession success stories
The growing number of businesses promoting from within can also be seen as evidence that companies are getting their CEO succession planning right. BP has famously never hired an external CEO in its 113-year history. Even when former Bernard Looney was forced to step down last year, after failing to disclose his past relationships with colleagues, BP had a ready-made replacement in Murray Auchincloss.
It suggests that listed companies are doing more to develop leadership talent
Lucy McGee, co-leader on CEO succession at Korn Ferry, says: “It’s a board’s responsibility and the chair’s main responsibility to make sure that there is CEO succession and that the organisation isn’t caught napping. For example, at BP where there was a very dramatic situation and the chief executive had to step down, they had someone ready enough in Auchincloss to step up.”
It’s for this reason that boards need to be prepared. “A similar situation can happen anywhere at any time,” she adds.
Having an active leadership pipeline is also positive for talent retention and can send a “very powerful signal” that the organisation values internal talent, McGee adds. “It suggests that listed companies are doing more to develop leadership talent and have a stronger bench.”
When to hire for the CEO role externally
This is not to say that external candidates are never the right choice for CEO. There are certain circumstances when someone with prior experience at CEO level is preferred.
Generally, this is when a company is going through business transformation or is in need of significant change. Bryant’s rule of thumb is that if a business is facing a disaster boards tend to hire externally, while if things are going OK they look internally.
The great advantage external candidates bring in these situations is a fresh perspective. “You consistently find that when an external chief executive is brought in, you’ll likely see more change in the organisation,” Bryant adds. “I just don’t think boards are looking for that at the moment. They want someone who can weather the storm.”
There needs to be clear blue water between the internal and external options
For boards to consider external candidates, they need to find someone who is at least 30% better than the options they already have within the company – something Langton terms ‘factor 30’. “The external candidate is likely to have been a CEO and be more mature with more personal wealth and more choice,” he adds. “But as a result of this, they may not want to do five years in the role and boards also perceive the risk that they could be seeking the short-term glamour of waving a magic wand.”
McGee agrees external candidates needs to be demonstrably better, saying there needs to be “clear blue water” between the internal and external options. She explains: “If you’re going to tell people currently in the executive committee that you’re going to bring someone in from outside the company, they need to be demonstrably better and more prepared for the role than any of them are.”
While this question of internal versus external is an important part of finding a new CEO, it should not be the only determinant. Boards need to be open-minded in their chief executive searches and to consider a diverse range of candidates. Only then will they get the best person for the role and set the business and the candidate up for future success.
