Companies should hire CEOs from within to ensure long term success

Subscribe to Oneindia News

Washington, January 21 (ANI): Promoting someone from the inside as the CEO can be more useful to the company in the long run than hiring someone from outside, says a new study.

Rice University's Jones Graduate School of Business' 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 outside. However, in later years, internally promoted CEOs outperformed externally hired CEOs.

Anthea Zhang, co-author and the Jesse H. Jones Distinguished Associate Professor of Management at Rice, said: "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 appropriate strategic changes is not seen immediately."

She added: "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 this research, 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."

The study has been published in the Strategic Management Journal. (ANI)

Please Wait while comments are loading...