Hiring A CEO: In-House Or External? The Eternal Dilemma
An ongoing debate within supervisory boards
Germany, Austria and Switzerland, known as the ‘DACH’ region, are German-speaking countries where supervisory boards not only define profiles and requirements for hiring the CEO but are also responsible for their appointment. Consultants and management auditors support these processes helping boards to ensure that suitable candidates have the required skills and experiences.
However, experience shows that this is only one side of the coin: We strongly believe that the company’s momentum plays a pivotal role in answering the question: Should this be an internal or an external hire?
We present three typical corporate dynamics:
1. Companies with a positive-growth trend
After many years of experience, we can affirm that in the DACH economic area, two elements are critically important for successful corporate performance, especially in larger companies: A strong corporate culture and stability.
Another interesting feature that we have noticed is if the company is doing well and on a positive-growth trend, bringing in an external CEO would be regarded as disruptive and negative, creating instability.
The performance of CEOs coming from one’s ranks is usually significantly better than that of external individuals because they know and understand better than an ‘outsider’ - all the dos and the don’ts of being an accepted and respected leader. Also, a company showing stability attracts young professionals, in turn creating a solid talent pool for leadership for the next generation.
The decision to promote an in-house professional to the CEO level or to hire externally is more complex for small and medium enterprises. This is because they form a large and significant segment of the DACH economies and make a strong contribution to innovation and exports.
First and foremost, in these companies, technological know-how is an important determinant of growth. And we have observed through the years that this is in most cases, abundantly available at the middle-management level, supporting the decision of in-house promotion. On the other hand, strategic foresight is needed to develop alternative products or services and to avoid the ‘complacency’ trap. In these cases, externally recruited executives with a broader perspective achieve significantly better results.
2. Companies in change mode
Fundamental changes are always a challenge for an organisation because most people tend to shy away from major change. There is much to suggest that a new CEO from your ranks will find it more difficult to adjust to change than an external one. He or she may have become a prisoner of the corporate culture and its networks, which could become a hindrance when it's time for drastic cuts or strategy changes. Despite being well-qualified, he or she will not possess diverse perspectives nor understand other corporate cultures. The pros and cons must be considered. Ultimately, an interim manager with a clear view, a cool mind and no emotional baggage may well be the better choice.
Companies with private equity ownership are a special situation - In too many cases, we have seen in-house managers taking the helm due to their undisputed and comprehensive corporate knowledge, only to recognise after some time the difficulty in fully understanding the views and goals of their new shareholders.
3. Companies in strategic reorientation
This is the most complex situation because variables are not necessarily under one’s control. Market trends, international financial crises, disruptive technologies, new competitors and many others are “new situations” with no “formula” to solve them in most cases.
The CEO to be appointed in these situations needs, in addition to traditional hard and soft skills, deep experience in solving crises. He or she needs to be especially resilient. This “crisis experience” could be more readily found in an external executive who comes with a diverse background and skill set.
In summary, the decision to appoint a CEO from within or outside requires not only an assessment of the candidates’ personal hard and soft skills but also an assessment of the company’s momentum.
No matter how carefully the profile was defined and which audits the person successfully and brilliantly completed, the final decision must consider the company's situation and its strategic perspectives.
Even in the case of a planned internal promotion, executive search consultants with their experience across companies, situations, and industries are qualified to offer advice and counsel to decision-makers in supervisory boards, advisory boards and shareholder bodies.