When the time comes, most companies tend to go out into the market to look for a CEO to run the business. They analyse the candidate’s track record, achievements and, in short, reputation. Then it’s time to introduce the new CEO to the team, show them around the company and bring them up to date on customers, orders and the company’s finances. The CEO is paid according to their reputation and perceived worth (past successes) and given a set of targets.
After a year, the CEO has probably not lived up to the company’s expectations, so the company goes back to square one and out into the market to look for a new CEO. Most of us will have seen this happen at one company or another.
The consulting firm Booz & Company carried out a study covering the world’s 2,500 largest listed companies. From 2009 to 2011, CEOs who had been promoted internally beat their local markets by 4.4% a year in dividends, while CEOs brought in from outside generated an average of just 0.5%.
The consultancy suggests that this difference in results comes down to the fact that internally promoted CEOs already knew how the company worked, its policies, its staff (with their flaws and strengths) and its customers, whereas the outside CEO lacked these advantages.
I would go much further than this consultancy’s conclusions. To begin with, we should ask what circumstances the outside CEO ran the company in. Did they run it during a recession or during a bubble? Was the sector favoured or punished during their tenure? Which other industry giants did they compete against?
Past success is no guarantee of future success, and that is a premise a company needs to keep in mind if it wants to avoid disappointment.
Advantages and disadvantages of promoting a CEO internally
The main advantage of internal promotion is that the company’s employees have the incentive of knowing they can grow professionally. It has been amply shown that companies with real chances of promotion tend to have a much more motivated workforce.
The downside of this same point would be internal “wars” between the top performers, although if the company manages to create an atmosphere of healthy competition among employees, the results will show.
Companies often hire an outside CEO but assign them a “guide dog”: usually an employee who is well enough prepared to explain to the “new” person how the company works and, while they’re at it, give some advice. Sometimes the CEO consults this person before making a decision. Perhaps the guide dog would have made a good CEO.
A company that does not prepare some of its employees to run it is a company whose best employees will leave at the first opportunity.
On the other hand, staff can end up feeling overlooked if they have managed to improve efficiency and productivity and then watch someone come in from outside to reap the rewards of years of work.
But which employee should be promoted, and how?
This is perhaps the hardest part for the company, since we could create the same sense of being overlooked if we hand-pick someone and the staff feel the person chosen is poorly suited to the job.
The internal CEO must have leadership skills, must not be afraid to make decisions and must have the respect of their colleagues, a respect earned the hard way through professionalism and honourable conduct towards them.
The internal promotion process should be gradual and selective, so that many employees can see which way things are heading and do not build up false hopes. The candidates should be employees who know the company and its customers inside out, those whose sales and/or output speak for themselves.
And so the game begins. You can set a period of three or six months and tell the shortlisted candidates that whoever wins the most sales or customers during that time gets the job. There is a much more direct method that is sometimes used: two rounds of voting. The first is simply an anonymous vote among the company’s employees, held without prior notice, asking them which colleague they think would be best suited to run the company.
It is rarely possible to draw a conclusion from this vote, although if 10% of employees point to the same person, you probably have the ideal candidate. I’m told that out of some 300 internal votes held among workforces of more than 50 employees, a figure above 2% has rarely been reached. The second vote would be among the company’s management.
As someone once said, “if we keep our eyes wide open, we will find that the future of a company, as a rule, lies within the company itself.” Even so, and despite the statistics, you can sometimes find a CEO on the market with an outstanding track record and well-deserved successes. That is why both internal and external promotion are options, but before turning to the second, we should study the first thoroughly.
Featured image: Ken Teegardin, CC BY-SA 2.0, via Flickr.
