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Contrary to conventional wisdom outside CEO achieves higher growth

Christian Fernsby ▼ | August 10, 2020
Whether a new CEO is promoted from within the firm or is hired from outside the company can have a profound impact on strategy setting and firm performance.
CEIO
CEO   Insiders have a deep understanding of a firm
When debating the merits of promoting insiders, the typical assumption is that insiders have a deep understanding of a firm’s core competencies and established internal social networks.

In contrast, outside CEOs are presumed to possess broader general skills and are believed to have an advantage in bringing bolder changes.

John Baia and Anahit Mkrtchyanb found in their research the first direct evidence on the performance differences between inside and outside successions using detailed level data from the U.S. Census Bureau.

"Utilizing a difference in difference approach, we find that firms with outside successions experience higher growth in productivity and operating margin relative to firms with inside successors.

"Our results show that the value of outside CEOs does not depend on prior performance, but their impact is stronger for firms operating in high-tech industries and more complex firms.

"These results suggest that boards might benefit from considering outside CEOs even when the firm’s performance is good.

"The empirical evidence we provide suggests that outsiders attain higher productivity by eliminating inefficiencies that existed prior to their appointment and adopting new technology.

"The thorough empirical evidence presented here suggests that there are substantial differences between internal and external successors, and these differences can have a consequential effect on firm productivity.

Our results do not imply that every firm should hire an outsider, but they suggest that inside successors might benefit from adopting an outside perspective, demonstrating a sensitivity to change, and challenging legacies and relationships that might diminish their effectiveness."


 

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