When Is an Outsider CEO a Good Choice?

Former IBM CEO Lou Gerstner is an example of a high-profile outsider CEO who became an effective change agent.

Image courtesy of IBM.

In recent years, established corporations such as Siemens, Hershey, 3M and Wrigley recruited new CEOs from outside the company for the first time in more than a century. Both General Motors and Hewlett-Packard have had more than one CEO who was brought in from outside.

But when is an outsider CEO the right choice? Outsider CEOs such as William Perez of Nike and Jeff Nugent of Revlon were hired by boards to lead their companies through major transformations but were not retained by the same boards through a two-year post-succession period. This suggests the possible existence of a paradox in which boards choose outsider CEOs with a presumed mandate for change but soon become dissatisfied with those same outsider CEOs.

We seek to elaborate and resolve this paradox of outsider CEO succession. Our research suggests that, on average, outsider CEOs are neither better nor worse than insider successors within a three-year succession period. However, we also found that new external CEOs outperform insiders under certain pre- and post-succession circumstances. Our results suggest that boards of directors can increase the probability of successful external CEO hiring if they choose such CEOs under the conditions of poor performance and/or high industry growth. Furthermore, external CEOs outperform insider successors when they replace the company’s senior management team with new executives. Our research also suggests that — contrary to conventional wisdom — company performance usually suffers when new outsider CEOs rush to make strategic changes in the early post-succession period.

We conducted a detailed empirical investigation of the performance and strategic change consequences of CEO succession in 90 single-business organizations over 30 years (1972-2002), using two contrasting environmental situations in terms of turbulence and growth/munificence: the U.S. airline and chemical industries. The sample included all public companies that reached $100 million in sales at any point between 1972 and 2002. We observed 163 successions. Some incompleteness in available data resulted in a final sample that included 140 succession observations, with 80 insider successions and 60 outsider successions. (We define outsider successions as successors who became CEO within two years of being hired from outside the company.)