Companies are better off in the long run with CEOs promoted from within the organization, while hiring from outside brings greater risk to corporate performance, according to a study from Rice University’s Jesse H. Jones Graduate School of Business.
The study, “Once an Outsider, Always an Outsider? CEO Origin, Strategic Change and Firm Performance,” examined the tenure of 193 CEOs in the industrial sector and their company’s performance history between 1993 and 1998. Researchers measured performance as industry-adjusted annual return on assets.
“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,” according to a statement about the research. “However, in later years, internally promoted CEOs outperformed externally hired CEOs.”
“Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes,” said Yan Anthea Zhang, the Jesse H. Jones distinguished associate professor of management at Rice. Ms. Zhang and Nandini Rajagopalan, professor of management and organization at the Marshall School of Business at the University of Southern California in Los Angeles, co-authored of the study.
After three years, inside CEOs fare better in performance. “When it comes to strategic change, outsiders typically are good at doing the rapid cost-cutting and divestment,” Ms. Zhang said in the statement. “As tenure increases, obvious opportunities for cost-cutting and divestment dry up. Inside CEOs, because of their deep knowledge and (roots) 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,” Ms. Zhang said in the statement. “Boards of companies need to recognize that hiring an outside CEO poses greater risks to the company’s performance in the long term.”