Who should be the next CEO? Someone inside the company who actually knows what’s going on? Or some outside flip-artist with an MBA from some Ivy League school?
A study by Rice University’s Jones Graduate School of Business says that insiders outperform outsiders over time.
The study examined 193 CEOs in the industrial sector between 1993 and 1998, noting that both insiders and outsiders come out of the gate at the same pace, but that insiders typically outperform after a few years.
“Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes,” explained one of the study’s authors, Prof. Anthea Zhang.
Insiders are better at running the business. Outsiders are better at gutting the business.
“When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment,” Zhang said. “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.”
Of course, boards of directors don’t always think about the long-term when they’re looking for a new CEO.
Often a flashy suit with a Harvard MBA and a hatchet is all they need to get them through the next couple of quarters. Why operate the company when there’s so much to be gained by selling it, doing another stock offering, or loading up the balance sheet with debt and taking a bonus?
It’s something to consider when you’re thinking about going to work for a company. Your career can be deeply affected by whether the CEO is insider or an outsider.
Click here to read study.