Appointing a new CEO: Why insiders have the edge

Appointing a new CEO: Why insiders have the edge

Halfway through the Olympics a rarely-noted statistic is that a high proportion of our medals have come from relay races and other team events.

Amid the soul-searching over the lower-than-expected medal count we shouldn’t lose sight of a powerful analogy for the best way to pass the baton when selecting new CEOs. It comes from the annual CEO Succession Study by Booz and Company, and it offers sound advice for new CEOs.

The study, released three months ago, found that boards wanting growth consistently appointed CEOs from outside their company, even though insider CEOs perform better and deliver higher returns to shareholders.

“From 2009 to 2011, insiders delivered a median 4.4 per cent shareholder return above regional market index, while outsiders delivered just 0.5 per cent.” On average insiders also stayed in the job two years longer than outsiders.  

The Booz and Company study examines baton changes in large global companies. Melbourne-based CEO mentor Neville Christie sees a similar pattern in Australia. He believes that boards often hope that an external appointee will bring an injection of new ideas and perspectives and that they pay insufficient attention to the immensely valuable knowledge of the insider candidates.

Christie advocates looking for an insider who knows how to challenge assumptions and orchestrate creative and critical thinking, with the judicious use of external advisers. “These leaders can achieve more much faster than an outsider who has to spend the first few months building new relations and learning how the culture functions. They don’t always have to be creative or visionary.  Rather, they have to know who to deploy and when to inject these elements.”

In industries where turbulence is high because of disruptive market and technology forces, a CEO who can leverage insider knowledge when changing roles and structures to develop more agile and innovative organisation is even more important for success. The more frequent turnover of CEOs among companies in the more volatile energy, telecommunication and utility sectors suggests that boards are not choosing CEOs who can do this.  

These tips elaborate on the list, crystalising the reflections of “CEOs who have been there” by the authors of Booz and Company study. They apply equally to CEOs taking the reins in large and in medium-sized companies, suggests Christie.

1. Deal with obvious executive team problems as early as possible.

But don’t rush to clean out the cupboard and bring in familiar faces. Use the instruments available to identify natural role preferences and strengths as a basis for building a high-performance team, a star team rather than a team of stars.

2. Be wary of changing strategy too quickly, even if you think the current strategy is wrong.

Many CEOs are recruited to change strategy and direction and typically each CEO will oversee one major strategic change over the average tenure of three to four years. Examine company purpose and the merits or otherwise of the business model early on, allowing time to engage team members in the process of debate leading to major change decisions.

3. Make sure you understand how every part of the company operates and how it’s performing.

Consider whether performance problems are related to poor process design, inappropriate rewards or management and supervision deficiencies. Some MBWA (management by walking about) also gives you visibility.

4. Build trust through transparency, starting with the very first conversation.

5. Seek advice, while being selective in listening to it.

Avoid the risk of giving more weight to the last person listened to.

6. Find a sparring partner with whom you can discuss plans openly.

Make sure that you consider advice from both an internal and an external sparring partner.

7. Manage your time and your personal life with care.

Combine a focus on managing your time and keeping a work-family balance with attention to uncovering the big, important – but not necessarily urgent – issues.

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