As CEO Turnover Rises, Outsiders Are Given a Closer Look

May 5, 2016 – Last year, 17 percent of the largest 2,500 public companies in the world changed their CEO, more than in any of the previous 16 years of the ‘CEO Success Study‘ from Strategy&, PwC’s strategy consulting business.

The report found that over the past several years more big companies have been deliberately choosing their new CEO from outside of the company as part of a planned succession, an indication that hiring an outsider has become more of an intentional leadership choice than a necessity.

Outsiders accounted for 22 percent of all CEOs brought in via a planned succession between 2012 and 2015, up from 14 percent in the 2004 to 2007 period. In addition, almost three quarters of all outsider CEOs were brought in during planned successions during that same period, up from 43 percent in 2004 through 2007.

However, the majority of companies have continued to promote insiders to the CEO position and the study authors think this will remain the preferred succession planning practice (77 percent insiders vs. 23 percent outsiders in 2015). Outsider CEOs have caught up and closed a performance gap that the study previously found between outsider and insider CEOs, possibly strengthening the case for considering a new leader from outside the company.

“Hiring an executive from outside a company to serve as chief executive officer used to be seen as a last resort. That is not the case anymore with the disruptive market-related changes that companies are facing today,” said Per-Ola Karlsson, partner and leader of Strategy&’s organization and leadership practice for PwC Middle East. While an internal CEO candidate may have an excellent record of achieving the business goals a company has pursued in the past, Mr. Karlsson said boards are recognizing that insiders might actually lack the skills needed to lead and see through the changes necessary to win in the future.

Mr. Karlsson, an expert in strategy formulation, organization development, corporate center design, and governance, has spent the better part of his 29-year career supporting companies in the areas of change management and people capabilities as a consultant with McKinsey & Co. and Booz Allen Hamilton.

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In a recent online poll by Hunt Scanlon Media, ‘Insiders vs. Outsiders: Which Candidate Type Fits Best, and When?’ its survey findings found that promoting from within remains a preferred way for organizations to address their leadership needs. But when executive recruiters are brought in to openly recruit for vacant positions, they are often given mandates to look wide and deep for candidates and that typically results in the search shifting to a hunt for outsiders.

When asked why internal candidates are given preferential treatment for job openings, 40 percent of respondents said ‘knowledge of the organization,’ followed by ‘sensitive to corporate culture’ (33 percent), and ‘demonstrated potential’ (27 percent). When asked what primary attributes external hires bring, 40 percent of respondents pointed to ‘innovation,’ another 40 percent said ‘change,’ while 20 percent thought that outsiders brought ‘fresh perspective.’ Interestingly, when asked if companies are ‘risk averse’ when it comes to expanding their leadership ranks with outside talent, a third responded that they were.

2015: Not the Year of the Woman CEO

Globally, the share of incoming women CEOs fell to less than three percent in 2015, the lowest percentage since 2011, according to the PwC report. Just 10 of 359 incoming CEOs in the class of 2015 were women. “This is an astoundingly low figure given the global focus that executive recruiters like Egon Zehnder, MWM Consulting, Russell Reynolds Associates, Spencer Stuart and others have put on this problem,” said Scott A. Scanlon, Hunt Scanlon’s founding chairman and CEO. “Empowering women leaders, I thought, was becoming a 21st century rallying cry for boards of directors. Apparently, not so.”

The news was even worse in the U.S. and Canada where the share of incoming women CEOs fell for the third year to the lowest in the study’s history. Surprisingly, there was just one woman among the total 87 incoming CEOs in the U.S. and Canada last year (one percent, compared to four percent in 2014 and over seven percent in 2012).

Female CEOs are more often hired from outside the company than male CEOs are, according to this study. Thirty two percent of all incoming and outgoing female CEOs from 2004 through 2015 were outsiders compared to just 23 percent of males CEOs.

“That women CEOs are more often hired from the outside may be an indication that companies have not been cultivating enough female senior executives in-house,” said DeAnne Aguirre, an advisor to executives on talent and culture with Strategy& and a principal with PwC U.S. “One of the reasons why women may be more likely to be outsiders is that their development is not being recognized within their own organization, and therefore they may be more likely to be attracted away.”

“The fact that more companies are now considering outsiders might improve the chances for women CEOs in the future. One can only hope, and wait,” said Mr. Scanlon.

More Facts on the Rise of Outsider CEOs:

• Some of the industries that have been experiencing the most disruption are also the ones that have brought in higher-than-average shares of outsiders over the last several years. This includes telecommunications (38 percent of incoming CEOs from 2012 to 2015 were outsiders), utilities (32 percent), healthcare (29 percent), and energy (28 percent);

• On the other hand, IT (15 percent), materials (19 percent), retail and consumer (19 percent), and industrials (21 percent) hired the lowest share of outsiders from 2012 to 2015;

• From a regional perspective, from 2012 to 2015, companies headquartered in Western Europe hired outsider CEOs almost twice as frequently as companies headquartered in U.S. and Canada (30 percent vs. 18 percent, respectively).

“Boards of directors following well thought-through succession plans should have a deep bench of strong, internal candidates. However when the company needs to make transformational changes away from their former strategic and operating plans, boards should factor the ‘outsider option’ into their succession planning,” said Gary Neilson , thought leader on organizational design and leadership with Strategy&, and a principal with PwC U.S.

Outsiders don’t have biases and commitments built up over the years, he said, and they can therefore make changes more objectively. “They also may be able to look at the organization from a broader perspective based on an understanding of what the world will require in the future,” he added.

Whether a new leader comes from inside or outside the organization, companies that plan for CEO succession carefully are more likely to be better performing companies in general, said Mr. Neilson.

Clarke Murphy, CEO of Russell Reynolds Associates, agreed: “Since the financial crisis,” he said, “boards are more committed than ever to long term succession planning and rigorous processes to find and select the best executive to succeed incumbent CEOs.” He said their efforts “reflect a deliberate process” that is now resulting in superior leaders being put into position.

Biggest Threat: Succession Planning Lags at Many Companies

Even so, CEO succession planning appears to be lagging within many companies.

Seventy four percent of HR leaders have identified leadership succession as a primary internal challenge they face, according to a survey by talent solutions provider Lumesse and research company Loudhouse. The identification of leaders is crucial to mitigate against the loss of critical talent in the future, something that 73 percent of respondents said is the biggest threat to their business over the next 12 months.

‘The CEO Succession Planning Survey,’ conducted by consulting firm AlixPartners and executive search firm Vardis, reached similar findings. Their report found that more than half of companies do not have a strong candidate prepared in the high risk, and not uncommon event, of a CEO transition. Of all respondents, 31 percent said they had no CEO successors identified, while 20 percent said their firm had just one successor identified.

The AlixPartners / Vardis study also found differences between company types are prevalent. Public companies are the most prepared, with just 18 percent lacking a potential CEO successor candidate, while in the case of portfolio companies, 48 percent reported having no formally identified CEO successor candidates. Among smaller PE portfolio companies (revenues below $100 million) 59 percent said they lacked having a successor candidate in the pipeline.

The report also noted that the development of potential candidates also varies. Across all companies, 31 percent said they provided no formal preparation or training for the identified CEO successor, a number which increases to 50 percent for private equity companies. Across all organizations, on-the-job experiences (37 percent), coaching (36 percent), and formal assessments of strengths and weaknesses (34 percent) were provided to potential candidates.

“It is difficult to understand why so many organizations continue to under-assess and under-prepare the individuals they plan to launch into their company’s highest role, especially in light of recent high-profile CEO transition failures,” said Ted Bililies, managing director at AlixPartners and global head of the firm’s leadership & organizational effectiveness practice.

All that aside, George Davis, global CEO practice leader for Egon Zehnder, said: “As we have an seen increase in the number of companies that are planning for succession it makes sense that we would begin to see an increasing number of outsiders deliberately chosen.” There is more at stake now, he added. “As companies face tremendous pressure from shareholders, activists investors, new competitors and digital disruption, it is essential to get succession right — and one aspect is planning and ensuring that you have a robust plan in place that looks at internal and external candidates and covers multiple scenarios; the second aspect is weighing the risks and making an informed decision.”

As a result, search firms are stepping up their CEO practices, where assessment advice and strategic counseling services are helping to expand revenues just at a time when their core recruiting businesses are declining, according to ‘Adapting to Change,’ an industry report published by Hunt Scanlon that is due out next month.

Here’s how several search outfits have been responding:

• Ryan Search & Consulting formed a partnership with the Center for Creative Leadership (CCL) to provide clients with a deeper array of leadership development resources. A global provider of leadership development, CCL works with individuals, teams, organizations and companies to help them achieve their objectives through leadership development & organizational guidance, coaching, change leadership, culture transformation and succession planning. For over 40 years, the firm has worked with more than one million leaders at all levels in more than 130 countries worldwide;

• Heidrick & Struggles named Bonnie Gwin and Jeff Sanders as co-managing partners of the firm’s global CEO & board practice groups. Ms. Gwin previously served as managing partner of the firm’s board practice in North America. Mr. Sanders brings more than 20 years of experience to his new role. The firm also appointed Tom Moran as a partner and member of the its CEO and board practice. Based in Chicago, he has more than 22 years of executive search experience having placed hundreds of CEOs, CFOs, COOs, CMOs, board members, and functional leaders in companies around the globe;

• Former Egon Zehnder partner Rob Sloan recently launched Starboard Tack Partners, a strategic talent development and advisory services provider to boards, chief executives and executive teams in the financial services sector. Mr. Sloan said he decided to set out on his own to take advantage of the “major shift toward more diversified services” in the executive recruiting and leadership solutions sector;

• In February, Heidrick & Struggles acquired Decision Strategies International (DSI), a Philadelphia-based strategy and leadership advisory firm. Founded in 1990 by Paul Schoemaker, DSI has advised some of the world’s best-known organizations; it specializes in strategic planning and decision making in uncertain operating environments, leadership development, and talent strategy. This acquisition comes on the heels of Heidrick’s acquisition of Co Company, a London-based advisory boutique specializing in leadership services that accelerate organizational performance. Both firms have now been merged into Heidrick’s leadership consulting business;

• Executive search firm Conroy Ross recently partnered with Optimum Talent, a privately owned integrated talent management firm. Together, they provide clients with a full offering of leadership solutions including executive search, leadership development, coaching, organizational psychology and career transition;

• Lilian Poilpot joined London-based executive search firm Erevena as a senior partner to further strengthen its European, Middle Eastern & African divisions. He recruits CEOs for telecommunications, information technology, consulting and private-equity or venture-backed companies;

• DHR appointed Kenneth Schwenke to the firm as a partner based in its Philadelphia office. He becomes a member of DHR’s board & CEO and human resources practice groups;

• Four months ago, Korn Ferry finalized its acquisition of Hay Group for $452 million. Hay Group now includes Korn Ferry’s former Leadership and Talent Consulting segment. Hay Group, founded 72 years ago, is a global leader in people strategy and organizational performance and is sure to give Korn Ferry the heft it was seeking to service clients well beyond its executive search services core offering;

• Caldwell Partners added Jay Millen as the leader of its CEO & board practice. He joins the firm from DHR, where he served as a vice chairman and head of the firm’s board and CEO practice group for just under three years.

Contributed by Scott A. Scanlon, Editor-in-Chief, Hunt Scanlon Media