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Why more boards are hiring outsider CEOs



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Hiring a chief executive officer from outside the company used to be seen as a last resort, but over the last several years, more companies have deliberately chosen to hire a outsider.

The Strategy&’s CEO Success study which covered hiring data of CEOs in 2,500 public companies worldwide found from 2012 to 2015, boards chose an outsider CEO 22% of the time in planned turnovers, up from 14% from 2004 to 2007.

In addition, 74% of outsider CEOs were brought in during planned successions from 2012 to 2015, up from 43% in 2004-2007.

Industries experiencing the most disruption have brought in higher-than-average shares of outsider CEOs, which include telecommunications (38% incoming outsider CEOs from 2012 to 2015), utilities (32%), healthcare (29%), and energy (28%).

On the other hand, IT (15%), materials (19%), retail and consumer (19%), and industrial (21%) hired the lowest share of outsiders from 2012-2015.

Companies have been hiring outsider CEOs with more industry and CEO experience – 65% of the CEOs hired in 2015 are from the same industry compared to only 57% in 2012.

More than two in five (41%) of the CEOs hired in 2015 have public CEO experience, while only 37% of the CEOs hired in 2012 reported having such experience.

The financial industry hired almost all of its outsider CEOs from its

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own industry, while only 8% do not have a finance background.

Outsider CEOs were more likely to be hired if the company was low performing, the chairman did not have CEO experience in the same company, and if the former CEO was also an outsider. If the outgoing CEO was also an outsider, 36% of the time they were replaced with another outsider CEO.

Outsider CEOs were less likely to be hired if the chairman was hiring their first CEO at the company, the former CEO had a long tenure, and if the company was large.

New chairmen are more likely to stick with the pedigree of the former CEO while experienced chairmen seem to ignore the pedigree of the former CEO. They choose perhaps more rationally as they know the company and its leaders better, writes the study.

Hiring outsiders has proven to be beneficial to businesses, for the third straight year, as outsider CEOs have delivered higher median total shareholder returns than insiders.

The report did point out one reason outsiders are performing better – they are succeeding a company that is in relatively better shape. Historically, most outsiders have been hired following forced successions, more often than not in situations where the company had not been performing well.

Not only more firms are hiring outsiders, CEO turnover rate globally rose from 14.3% in 2014 to a record high 16.6% in 2015. The higher rate was driven by a combination of unusually strong M&A activity and a rise in the rate of forced turnovers, according to the study.

In today’s globalised economy, it seems common sense for CEOs to have international working experience but the study showed that CEOs with such experience are actually on the decline.

Just 28% of incoming CEOs at the world’s 2500 largest companies had international work experience in 2015, down from 45% in 2012.

China has the least number of CEOs with international working experience at a lowly 3%, western Europe CEOs are the most internationalised at 42% followed by USA/ Canada with 30% of the CEOs having worked outside their home country.

ALSO READ: The 25 most overpaid CEOs

Image: Shutterstock

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