Booz and Company just released their annual study of CEO succession, “CEO Succession 2010: The Four Types of CEOs.” Buried inside is this tidbit.
“Insiders also last longer — in 2010, those insiders leaving office had lasted on average 7.1 years, versus 4.3 years for outsiders. This is not surprising; insiders have historically produced superior returns for their shareholders. Last year was no exception. Insider CEOs leaving office generated total shareholder returns on a regionally adjusted basis of 4.6 percent as compared with 0.1 percent among outsiders.”
Ponder those numbers for a moment. Companies with CEOs from inside are likely to stay longer and perform better in terms of total shareholder returns. Booz and Company has been tracking this for a decade. Just a month ago, A. T. Kearney and the Kelley School of Business at Indiana University released their study, “Homegrown CEO: The Key to Superior Long-Term Financial Performance is Leadership Succession,” with this conclusion.
“A study of S&P 500 non-financial companies over 20 years (1988-2007) shows that those companies that exclusively promote CEOs from within outperform companies that recruit CEOs from outside the company. The study identified 36 companies that exclusively promoted CEOs from within their own ranks over this 20-year time period and found that these companies outperformed other companies across seven measurable metrics: return on assets, equity and investment, revenue and earnings growth, earnings per share (EPS) growth and stock-price appreciation.”
Harvard Business School professor Joseph Bower, author of The CEO Within notes the obvious that insiders understand the culture and the power structure and already have information sources and connections in place. Insiders start with an advantage. In fact, according to Stephen Miles, of Heidrick & Struggles:
“External candidates need to be at least one-and-a-half times better than internals to take on the transition risk”
So, board members pay attention. It’s true that creating quality leadership development and a good succession plan in your company takes work. It requires an investment of time and an investment of money and it may require changing the way the company evaluates and rewards managers. Sure, it may not pay off during your tenure, but the odds are that you own a little company stock, so it’s in your interest to care. It’s simple. The odds are that if you improve leadership development and succession planning, you will do better. Take the advice of Damon Runyon.
“The race may not be to the swift, nor victory to the strong, but that’s the way to bet.”
