Problems Identified with Recruiting CEOs

The Kelley School of Business at Indiana University and global management consulting firm A.T. Kearney have released a report that may be troubling to those who recruit high-level corporate positions.  The findings suggest that companies are better served by hiring from within their own company than recruiting workers from outside their pool of employees.

The report, entitled “Homegrown CEO: The Key to Superior Long-Term Financial Performance is Leadership Succession” is available here.  Based on the findings from 500 industrial and manufacturing companies, the report shows that those companies that exclusively promote CEOs from within outperform companies that recruit CEOs from outside the company.  The 36 companies that hired CEOs from their own candidate pool were prove to excel in terms of their return on assets, equity and investment, revenue and earnings growth, earnings per share (EPS) growth and stock-price appreciation.

The report places much of the culpability on boards of directors that ultimately put little trust in the ability of their own employees to rise to the occasion of leadership.

Perhaps recruiters are able to make sense of the fact that it is much more costly to hire CEOs from outside the business.  Median compensation—salary, bonus, and equity incentives—for external CEOs is 65 percent higher than for those promoted from within.

Recruiters may also be able to shed some light on the small retention rate of CEOs recruited from outside.  Forty percent of CEOs recruited from outside last two years or less and almost two-thirds are gone before their fourth anniversary.  Certainly, it takes a lot of people’s resources to train any new member of an organization– especially a leader.  This high turn-over must be unsettling for many companies around the country.

But every worker was once an outsider.  Everyone remembers what it was like to join a new cohort of co-workers.  The question seems to be, what should recruiters be aware of when placing people in positions with the most authority? What are the benefits of recruiting from the outside which may be buried from view of the numbers?