RICE—While hiring a CEO from outside the company may initially bring fresh ideas, a new study shows that promoting someone from within is a better strategy in the long run.
“Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes,” says Anthea Zhang, the Jesse H. Jones Distinguished Associate Professor of Management at the Jones Graduate School of Business at Rice University.
“Therefore, the relative advantage or disadvantage between ‘inside’ and ‘outside’ CEOs in initiating and implementing appropriate strategic changes is not seen immediately.”
The study looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998 and found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside.
However, after three years, it’s clear that inside CEOs fare better than outside CEOs, Zhang says.
“When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for cost cutting and divestment dry up.
“Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm’s long-term competitive advantage,” Zhang explains.
“From the implications of this research, it’s clear that companies may be better off in the long term led by CEOs groomed from the inside as opposed to CEOs from the outside,” Zhang says.
“Boards of companies need to recognize that hiring an outside CEO poses greater risks to the company’s performance in the long term.”
The study has been accepted for publication in Strategic Management Journal and was coauthored by Nandini Rajagopalan, professor of management and organization at the Marshall School of Business at the University of Southern California in Los Angeles.
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