If you serve on a company's board--whether it's a startup or a larger, public company--you'll face the prospect of replacing the CEO someday. There are plenty of reasons for that day to happen. Maybe, like in the current environment, you have a whole generation of Baby Boomers looking to retire. Or perhaps they need to replace the CEO for other reasons that could range from illness or malfeasance to simply a lack of performance.
Regardless of the reason, as a board member, you will be faced with a difficult decision on choosing the successor. And one key question that you'll have to answer is whether to choose an insider, someone who already works for the company, or go outside for the replacement.
The research on the topic largely aligned: insider successors tend to be far more successful than outsiders in replacing a CEO.
Insider successors are also far more common despite the high-profile CEO recruitments you might read about in the media. A 2019 research study found, for instance, that nearly 80 percent of all CEO successions involved an insider.
It makes sense because the research also tells us that insiders tend to perform better in the short run, because they don't represent a cultural shock the way bringing in an outsider would. Because the successor is known to the organization, stakeholders tend to buy in far more quickly than an outsider alternative.
Put another way: If you as a board have a qualified insider candidate primed to take over as CEO, that's likely the easiest and best solution on the table.
Successful Succession Planning
If you want to hand off the company to an insider candidate, your company will need a robust succession plan to help steer that decision. A good succession plan process will ideally have identified multiple potential candidates and developmental programs for each of them to help them grow as leaders in ways that would enable them to hit the ground running should their name be called.
But this isn't something that you can do at the last minute. An excellent succession planning process takes time to put in place, and it should never stop.
The big challenge a board faces is what to do if the organization doesn't have a succession plan in place or qualified insiders to take over the role of CEO.
Avoid the Board
One of the solutions some boards turn to when they lack a qualified in-house successor is to promote one of their own into the job. While this might seem to make sense on paper--mainly if the board member has run companies before--it's a terrible idea even when it's meant only as a temporary solution.
The research shows that putting a board member into a caretaker role negatively impacts both performance and stakeholder buy-in. In other words, this is only an option of last resort.
Time to Go Outside
So, if you face the scenario of lacking a qualified insider candidate, and you don't fall into the trap of promoting a fellow board member into the role, it's time to consider finding someone from the outside to fill the position.
The catch is that you will be sacrificing short-term performance because the outside CEO will need to invest time and energy in building relationships inside the organization and with its stakeholders. They will also need to learn the business, although this is mitigated by hiring from within the industry.
However, the potential good news is that bringing in an outsider can drive long-term solid results that might surpass what an insider could produce.
That's because an outside CEO can enter the job with a clean slate and fresh eyes and not get stuck in the status quo. They can "break" things and get away with doing so easier than insiders could. That's also why, if a company is struggling to keep up with its market, choosing an outsider as CEO might even become the better strategic play, because it will give you more leeway to make more dramatic changes.
If you're a board member dealing with a CEO succession soon, first look at the kind of succession planning the organization has in place to see if you have qualified candidates to take internally. That's your best bet. But, if you don't have any good internal candidates, or if the organization needs a major strategic shakeup, it might be time to look outside the company for its new CEO.