Traditionally, the majority of companies haven’t favored outside hires for CEO positions. Recent research, however, suggests that thought process may be changing.
CEO appointments, in general, are up. Out of the largest 2,500 public companies in the world, 17 percent — the biggest proportion in 16 years — switched to a new chief executive officer in 2015, according to research from PwC’s Strategy&.
From 2012 to 2015, the companies’ boards chose external CEO candidates during 22 percent of planned successions. Several years prior, between 2004-2007, the total amount of outside hires was 14 percent.
A growing number of organizations taking a more serious look at external CEO candidates could have a significant impact on future CEO succession planning and recruiting efforts at companies around the globe.
A few trends have already taken shape:
Sectors experiencing change have been more prone to outside CEO recruitment
Some disruption-inclined industries — such as telecommunications, utilities and healthcare — have brought in higher-than-average percentages of outside CEOs in recent years. Thirty-eight percent of telecommunications CEOs, for example, came from external organizations from 2012 to 2015. Nearly as many — 32 percent — of utilities CEOs were from other businesses.
Some regions have held back on hiring a CEO from outside
Compared to the 30 percent of U.S. and 18 percent of Canadian-headquartered companies, Western European-based companies brought in outside CEOs almost twice as often, according to PwC.
Several drivers appear to be influencing external CEO candidate growth, including:
Candidates may have an advantage because they’re outsiders
Today’s boards, according to The Wall Street Journal, want leaders with various experiences — a public company background, time spent abroad — that analysis has shown can help positively influence investor returns. Nearly three-quarters of chief executives that had supervised a global function or worked overseas, for example, saw a higher return than CEOs who hadn’t, according to the research the paper published.
However, internal candidates seem here to stay
Although outside CEOs have increased in popularity somewhat, potentially making them a more frequent option for some organizations in the future, most companies, according to PwC, still promoted insider candidates to CEO positions, which the study’s authors predict will remain the norm for succession planning.
Research published by Spencer Stuart also indicated internal candidates were still the primary choice for CEO positions in the U.S., at least. Roughly four out of five S&P 500 companies that selected a new CEO in 2015 went with an inside choice — the highest amount since the company started calculating CEO changes 12 years ago.
Hiring a CEO from another organization isn’t necessarily a bad thing. As with any position, though, finding your company is unprepared to deal with a key vacancy — due to a lack of internal or external candidates — can quickly become an issue.
Given the CEO’s public status, the stakes are high when a replacement is needed. Recent events have highlighted the need for expecting the unexpected in succession planning — particularly when a CEO is involved.
As a result, it’s important to include outside contenders in your CEO succession planning efforts, along with internal options.
Passive recruiting may help your organization prepare to fill leadership vacancies with an external CEO candidate, if needed. For other CEO succession planning tips, refer to our recent blog post on HR’s biggest planning challenge, and download our free whitepaper on how to increase your succession intelligence IQ.