The Leader Within

In most of the world’s major industrial countries, corporate law assigns the job of selecting the chief executive officer to the board of directors. In practice, however, the board’s role in managing a succession process, though important, is distinctly subordinate to that of the incumbent CEO. Indeed, in the case of large publicly held corporations, if the board is actually and not just formally choosing the CEO, it is usually a sign that the succession process has failed and that the incumbent chief executive is on the way out.

Inside Advantage

A fast-departing CEO usually signals poor economic performance, although most highperforming companies regress toward the average within a decade. One constant associated with companies that can sustain high performance is that they manage succession well. And more often than not, these longterm high performers pick insiders to succeed incumbents. My research also shows that CEOs chosen from inside the firm perform better than outsiders, whether or not the company has been doing well (although the difference is less dramatic when company performance prior to succession has been good).

Careful case-by-case analysis of succession suggests that the reasons for this difference in performance have to do not only with knowledge of the company’s technologies, operations, and competitors, but also its capabilities and culture. Moreover, increasingly competitive global markets mean that world-class efficiency, capability for innovation, and customer focus are all necessary for a company’s sustained success. To achieve these capabilities, continuity in leadership is critical.

In the face of the complexity of modern companies and the growing demands on leadership, turnover at the top is increasing, as is the number of outsiders chosen to be new CEOs. As indicated by recent events at Merrill Lynch and Citigroup, for example, we are in the throes of a succession crisis.

Why is the process working so badly? To begin with, some CEOs find the prospect of succession depressing. For them, it means failure or organizational death. They think of building a cohort of potential leaders not as the path to growth and prosperity, but as a sure route to their own lame-duck status.

Even among those executives who plan for succession, some manage the process in such an imperial, overbearing fashion that the potential crop of leaders withers in the shade. Some incumbent chief executives also fear being surpassed.

Many companies think a horse race is all they need to pick a winner, without worrying about whether the horses are fast enough for the years ahead. These are companies that pride themselves on being obsessive about managing for performance, on paying and promoting those who deliver, while firing those who don’t. But often they turn out to be companies that think developing general managers is a waste of time, human relations an administrative task to be delegated and then ignored, and succession what you worry about the year before the CEO retires.

Inside-Outsiders

Although I’ve already suggested that the best place to look for a CEO successor is inside the organization, the trend is toward hiring outsiders. Why? Because the process of nurturing great candidates is demanding, and many corporations do a poor job of developing insiders who might do a good job of leading them. As a result, many companies—more specifically the CEO and the board—are often forced to go outside for candidates.

In addition, when many CEOs and their directors finally turn to the subject of succession, they may have a bias against insiders. If things have gone well, it is easy to develop the view that “The demands of our scale and scope are more than any of our people can handle. They haven’t grown with the company.” In a similar vein, an imperial CEO may believe that “None of my people are up to my standard.” Many chief executives who think that way have created a self-fulfilling prophecy. Most problematic, the insiders who have demonstrated good performance sometimes seem to lack strategic vision. They are inside-the-box operators who don’t understand the need for change.

The answer to problems with CEO succession is what I call inside-outsiders. These are men and women who have performed well and risen high, but have maintained their objectivity. They are aware of how much change is needed to sustain success or turn around a failure, but they also know the organization, its culture, and its people. They can do more than bring in consultants or make across-the-board cuts. Beyond getting short-term profits, they can build for future growth. These unusual people are often found at the periphery of the organization, managing new businesses or new markets.