Professors Rakesh Khurana and Nitin Nohria studied the CEO hiring practices at Fortune 200 companies across 16 years and charted the impact on operating returns to measure company performance.
Turns out success is largely determined by what happened under the incumbent leader and what the circumstances were leading to his or her departure.
- Promoting from within when a CEO is fired or departs "naturally" (like retirement) - No statistical significance occurred in company performance.
- Hire externally to replace a retiring CEO. - a nearly 6 percent drop in performance under that condition.
- Hire externally to replace a fired CEO- an increase in performance more than 4 percent during the three-year period following the change.
Performance of the team under the previous leader closely correlates with whether you should promote internally or hire externally.
If things are going well inside the organization, then strive to promote from within. This stability represents support for continuation of the successful way things have been done in the past. The newly promoted leader will also be able to navigate, leverage previously established relationships, and provide opportunities to advance new ideas more quickly.
Hiring externally, when things are already going well inside the organization, can negatively impact performance by causing friction and decreasing morale. Research shows this negative momentum goes all the way to the bottom-line.
If the team needs to break from the past, hire externally. A leader from the outside is less likely to get mired down in "organizational baggage" and can move freely to make the needed changes. The research shows how this can deliver increased performance.
How to Make a Decision to Promote from Within or Hire Externally
Look at the past performance of the team first. Are you satisfied with the results of the exiting leader?
If 'yes', strongly consider promoting from within even if the leader is not quite ready. The research shows this is the better decision if evaluated strictly on performance.
If 'no', consider these three questions before you hire externally:
- Are you willing to support the new team leader in the changes they will make?
- Will their incumbent team support them in the changes they implement?
- Does the new team leader have the freedom to fire and hire a more supportive team?
If you did not answer 'yes' to all three questions above, consider promoting from within first. If you end up hiring externally anyway, prepare for at least a temporary decrease in team performance. You may need to provide additional support to ensure long term performance.