Human Capital Briefs

Outsider CEOs Are on the Rise at the World’s Biggest Companies

April 20, 2016

It was hard to be more of an insider at The Walt Disney Company than COO Thomas Staggs. The 26-year company veteran had been widely seen as the heir apparent to CEO Bob Iger — that is, until Staggs abruptly stepped down this month. News headlines trumpeted “Walt Disney Co Investors on Edge” and “Disney’s Succession Plan in Disarray.” With Iger’s contract ending in 2018, the company said its board “will broaden the scope of its succession planning process to identify and evaluate a robust slate of candidates for consideration.”

That broader scope may extend well beyond Disney’s ranks.

A growing number of top global companies are turning to outsiders in their planned succession processes, according to the annual CEO Success study conducted by PwC’s strategy consulting business Strategy&. The survey of the 2,500 largest public companies around the world found that 22% of CEOs hired in a planned succession over the previous four years came from outside the company. (Planned successions exclude mergers and acquisitions, as well as situations when CEOs are abruptly forced out.) That’s nearly double the rate from 2004 to 2007. Outsiders, in effect, have become more of an intentional leadership choice than a stereotypical hire in a turnaround or crisis situation.

“They used to be seen as a last resort,” says Gary Neilson of PwC U.S., one of the authors of the study. “But they’ve kind of come into their own.”

There are several reasons why the top job is increasingly going to outsiders when boards have time to plan for succession, which was the case for nearly three-quarters of CEO hires from 2012 to 2015.

The industries facing the most disruption have brought in higher-than-average numbers of outsiders recently. “The level of discontinuous change — when companies need to change their business model or do something they’ve never done before — is driving the desire to bring in outsiders,” says Neilson. That helps explain why 38% of incoming CEOs in the telecommunications industry during the previous four years were recruited from outside the company. Other industries with relatively high rates of outsider CEO hires include health care, utilities, and energy. An external hire, with experience in different competitive landscapes and unburdened by a long history and tangled relationships within the company, can have an easier time driving major changes.

The threat of activist investors pushing their own external candidates also appears to be encouraging corporate boards to look past the strong internal candidates they’ve been grooming. “We’ve spent a lot of time with companies that are worried,” Nielson says. “Chairs are saying, ‘You know, let’s get out in front of the problem before we have a Wall Street Journal[–reported] boardroom coup.’”

Another factor is the declining prevalence of CEOs who hold the title of board chair, as an independent chair makes it easier for boards to discuss succession without the CEO in the room. Last year 7% of incoming CEOs hired held the joint title of chair, a record low in the study — that’s down from 48% in 2002.

Regional preferences also influence chief executive hires. Companies in Brazil, Russia, and India, the study shows, are seeing big increases in recruiting the top job from outside. Western European companies hire outsider CEOs nearly twice as frequently as companies in the U.S. and Canada, countries whose collective gradual decrease runs counter to the global trend. (Though some research points to a prevalence in the U.S. of “inside-outsiders,” internal hires who maintain a strong objectivity streak.)

The growing comfort among the largest public companies with hiring chief executives from outside may improve the prospect of more women CEOs in the future, although 2015 offers a dismal showing: Less than 3% of incoming CEOs at the study’s 2,500 companies were women, the lowest share since 2011. (Just one woman was among the 87 incoming U.S. and Canadian CEOs in the study.) PwC’s Spencer Herbst attributes that to a statistical anomaly rather than the harbinger of an emerging trend.

“If you look at the regions and especially the industries that had high turnover this year and that made up most of our annual sample, it was kind of bad luck that they haven’t historically hired a lot of women CEOs,” Herbst says.

The growing legitimacy of outsider chief executives hired in planned successions suggests that the low number of women CEOs will climb. That’s because the CEO Success study found that female chief executives are hired from outside the company more often than male CEOs are — 32% of outgoing and incoming CEOs from 2004 to 2015 were women, versus 23% were men. According to PwC’s DeAnne Aguirre, one reason for this may be that when companies fail to groom women for top leadership positions, those women are more likely to be recruited away. (See also: “How Female CEOs Actually Get to the Top.”)

They’re not high. After all, hiring from inside remains the strong majority choice. And the CEO Success study shows that the longer the outgoing CEO has been in office, the more likely companies are to hire from within. Iger has been in charge of Disney since 2005. Additionally, the study shows that the larger a company is, the less likely it was to hire an outside CEO.

Even so, it would no longer be very surprising if Disney’s board were to choose someone from outside the company. The CEO Success study shows that outsiders not only are increasingly seen as a viable option in a planned succession but also may perform better. For the third straight year in the study, outgoing outsider CEOs left the top job after having delivered higher median shareholder returns than outgoing insider CEOs did. The authors believe that as the top global companies increasingly turn to outsiders in planned turnovers rather than in crisis situations, those chief executives are getting a better chance to show their worth.

 

This blog first appeared on Harvard Business Review on 04/19/2016.

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