Change is an inevitable reality of business, and at no time is this more evident than when a CEO exits a company. The median tenure of a CEO is six years, and so, organizations will go through many cycles of this important transition at the top. In most cases, this transition is carefully managed, but in some instances, it is an unexpected and unplanned one. The transition of a CEO can affect employee morale, performance, stock market performance and eventually, the bottom line—either for the better or for worse. According to one survey, 55% employees reported chronic mental stress during organizational changes as opposed to 22% who did not have to contend with any changes.
Much has been discussed about succession planning for the CEOs role in enterprises and how they should approach it. A 2018 Harvard Business Review study set out to find whether companies would benefit from hiring a new CEO externally or internally. Conceding that empirical literature on CEO succession offered no clear-cut answers, the study concluded that outsiders were better for certain industries such as health care and hospital sector.
The final decision can be taken only when companies carefully weigh the pros and cons against their objectives, organizational culture and the experience and expertise of candidates in consideration.
hiring an external candidate for the CEO position
The pros: When the CEO is being hired externally, the board will have probably considered CEOs or senior level CXOs of other companies with proven track-records of high performance. These individuals could bring unbiased and fresh perspectives and insights to ongoing issues that may escape the attention of an insider who has become conditioned to them.
More often than not, they could be experts in setting things right and reviving businesses—a fact that companies in trouble may want to take advantage of. Depending on the hire’s track record and industry reputation, the decision can also positively impact the company’s stock market performance.
The cons: When deciding to hire an outsider, it is important to assess the organization’s appetite for change. Changes in organizational and office culture may not always be appreciated. While millennials tend to view change positively, an organization comprising mostly of older workers could prove resistant to change, negatively impacting employee morale and performance.
There are also other nuances to watch out for— the old favorites of the ‘boss’ could fall out with the new and vice versa. The new hire may be unaware of existing sensitivities and this could ruffle feathers in senior management, especially if they bring along with them other senior experienced professionals as a sign of changing times and change in workplace practices. Though an extreme worst case scenario, there could be loss of significant knowledge and resources due to a mass exodus of employees who leave out of loyalty to an old system or the old leader.
hiring an internal incumbent for the CEO role
The pros: Internal promotions cost about 20% lesser than external hires. Since internal candidates are familiar with the organizational structure, leadership team, strengths and challenges, they can get up to speed on the role faster than external hires. Having been in the organization, they are likely to have established strong relationships with senior leaders, enabling the organization to move ahead smoothly during this period of change. Promoting an internal candidate also increases employee morale and increases engagement by sending a positive message that there is potential for upward growth. To know more on how organizations can design a successful succession plan and groom potential internal candidates for the top job, read our article on grooming future leaders.
The cons: Internal candidates are less likely to make dramatic revisions to company policies or strategies, which may sometimes help stabilize the organization. However, they are also more likely to favor status quo in several areas and may remain blind to organizational shortcomings as a result of overfamiliarity with established practices. If the company needs a dramatic shift in direction and management, it is unlikely that an internal candidate can provide this spark. Moreover, if the organization’s succession plan is not a transparent process, the promotion of one employee over another can prove a rocky transition and disrupt the drive of the entire team.
There is no simple formula to decide whether an external or internal hire would work better. Eventually, the decision will rest upon the individual company— its history, context and culture. Irrespective of this however, every company should invest time and resources to identify and groom a second line of leaders who can step in at short notice either as an interim CEO or a leader for the long term.
Here are seven best practices to ensure successful succession planning:
- The decision needs to be led from the top—right from the current CEO and including the CFO and the CHRO, in discussion and agreement with other CXOs and the board of directors.
- The HR team must be reinvented. Traditional HR roles need to automated, leaving room for HR professionals to focus on strategy and talent development.
- Reviewing talent and charting a growth trajectory for potential leaders should be an ongoing activity. This would include providing upcoming leaders with stretch assignments.
- While reviewing candidates, the process followed needs to be a scientific one rather than one that is based on personal preferences.
- A culture for developing second line leadership should be inculcated along the ranks, including for business units and departments.
- High potential individuals should be given opportunities to grow not just in a linear fashion but laterally as well.
- Make conscious moves to incorporate diversity across the ranks by exposing insiders to the outside and vice versa.