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Insiders promoted to the CEO role consistently outperform outside hires, according to a new study by the Yale School of Management. “It’s not even close,” said Professor Jeffrey Sonnenfeld, who conducted the research into the past five years’ Fortune 500 appointments with his colleague Steven Tian.
Boards are more inclined to bring in an outside “savior” when they are in trouble, and therefore less likely to deliver outsized returns. But that impulse is often misguided, Sonnenfeld said: “Someone on the inside often gets disparaged too quickly because you know their successes, but you also know when they tripped up… even though they’ve often learned a lot from an internal misstep.”
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With some notable exceptions, bringing in an outsider can send the morale-sapping message that the board has lost confidence in its other executives, Sonnenfeld warned. So while directors should benchmark internal successors against strong outside candidates, “they shouldn’t have a predilection that the outside hire is necessarily better… whatever the headhunter tells them.”
Yale’s study, published in the week that Walmart announced that John Furner would step up from running its US business to succeed Doug McMillon as the retailer’s CEO, shows particularly sharp underperformance by outsiders in the first year after their appointment.
Sonnenfeld pointed to earlier studies that suggest that CEOs picked from within take half as long to get to grips with the job. “If you’re an insider, you know who’s on your side, and who’s trying to sabotage colleagues,” he said. “An outsider really doesn’t know who the sycophants are — who are just toadies kissing up to the new boss, or who genuinely is an enthusiast of the new mission.”
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- One key factor differentiating companies that do well at succession planning from those that do badly is the incumbent CEO’s willingness to engage in the task of picking someone to succeed them, another recent analysis of succession pitfalls found. “Superficial assessment of external talent” is another.