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"When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for cost cutting and divestment dry up."

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Companies Better Off Hiring CEO From Within? (1 viewing) (1) Guest

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TOPIC: Companies Better Off Hiring CEO From Within?
#1978
Companies Better Off Hiring CEO From Within? 2 Weeks ago Karma: 0  
When a company wants to appoint a new CEO for strategic changes, they would be better off in the long run by promoting someone from inside the company, rather than hiring someone from the outside, according to a new study from Rice University's Jones Graduate School of Business.

The study, "Once an Outsider, Always an Outsider? CEO Origin, Strategic Change and Firm Performance," looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outsisde. However, in later years, internally promoted CEOs outperformed externally hired CEOs.

Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes. Therefore, the relative advantage or disadvantage between "inside" and "outside" CEOs in initiating and implementing strategic changes is not seen immediately.

However, after three years, it's clear that inside CEOs fare better than outside CEOs, according to the research. When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for cost cutting and divestment dry up. Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm's long-term competitive advantage.

From the implications of the research, say its authors, it's clear that companies may be better off in the long term led by CEOs groomed from the inside as opposed to CEOs from the outside. Boards of companies need to recognize that hiring an outside CEO poses greater risks to the company's performance in the long term.
 
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#1980
Re:Companies Better Off Hiring CEO From Within? 1 Week, 6 Days ago Karma: 1  
This makes sense. But, there are lots of situations when an outsider is needed. In a big corporation with entrenched bureaucracy and a culture of inward-looking myopia (GM) you need an outsider who sees things differently. And there are other times when an insider just doesn't have the necessary perspective.

But more often, a smart insider able to think creatively and who knows the culture, would work better.

There's another issue, too, that has nothing to do with insider vs. outsider--it's whether the person is best at crisis mode or growth mode. Each needs a different set of skills, I think.
 
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#1981
WFC ()
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Re:Companies Better Off Hiring CEO From Within? 1 Week, 6 Days ago Karma: 0  
Anne,

When I was thinking about what types of companies NEED to look outside their own ranks, the first one I thought of was GM, too. I'd wager we are far from alone in that regard.

Another that sprung to mind was Yahoo. For a long time the company excelled under an outsider, Terry Semel. But he took a young company and matured it. When Yahoo stagnated, it turned to co-founder Jerry Yang to reinvigorate it with some of the old magic. Well, he turned out to be no Steve Jobs in that regard. I don't know if Carol Bartz is the answer. Heck, I don't know if there is an answer for Yahoo. But I do believe the company had little choice but to find someone whose mentality wasn't stuck in the company's past success. I think Yang was crippled by the idea of how things used to be and couldn't guide the company through its current predicament.
 
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#1982
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Re:Companies Better Off Hiring CEO From Within? 1 Week, 6 Days ago Karma: 0  
I agree that if a company wants to send out a clear message of change, it has to look for someone from outside.

Then I wonder if Bank of America was right to name Moynihan, an insider. Bofa reported a loss today of $5.2B for the fourth quarter. It's true that much of that loss can be attributed to bad moves made before Moynihan joined the company (actually TARP repayment to be accurate). Let's give him the benefit of the doubt.

Still, when I hear that he said in a conference call that he wants to strike a balance between Hugh McColl, CEO of the bank in the 1990s, and Ken Lewis (http://charlotte.bizjournals.com/charlotte/blog/bank_notes/2010/01/brian_moynihans_mission_balance_mccoll_and_lewis.html), it doesn't tell me that change is on the way, even though that's what most banks need after one of the worst financial crisis in history.
 
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