Should Your Next CEO be an Inside Outsider?

Harvard Business Review

Grow your own. That's always been pretty good advice, whether of the horticultural or organizational variety. It's generally cheaper and better to encourage colleagues to build a career with you rather than instinctively going outside to hire new people.

But when it comes to the top job, opinions vary. Some businesses like to try and groom internal candidates, giving them "stretch assignments," in the hope of preparing a number of potential candidates to take over, if need be, without the organization's missing a beat. Others, particularly companies that are performing badly, are more inclined to bring someone in from the outside. The expectation is that they will act more boldly to make change.

Organizations and circumstances are never quite the same, of course, so beware of anyone suggesting that there is always one preferred route to take. But two big appointments in the UK in the last few days should remind us that there is a third possibility in managing the subtle challenge of filling the hot seat.

The BBC has just appointed its second new "director general" (equivalent to CEO) in the space of three months. The first, a seasoned insider called George Entwistle, came unstuck over the mishandling of two child sex scandal stories, one of which was wrongly suppressed, and another of which was broadcast, but in (costly) error. Although (but also perhaps because) he was an insider with over two decades' experience at the BBC, Entwistle made too many mistakes to survive.

His replacement, Tony Hall, also has over 20 years' service at the BBC—but reached that point over a decade ago. He then left, in 1999, when he failed to win the top job. For the past 11 years he has been running the Royal Opera House in Covent Garden. Amusingly, one of the things that counted against him back in '99 was that Hall had never worked outside the BBC and was seen as lacking commercial experience.

When he takes up the job of DG in March next year, Hall may present us with a textbook case of what can be accomplished as an "inside outsider." He will bring with him a firm grasp of the essential character of the BBC—a unique organization—but with the perspective of someone who has been busy doing something else for the past ten years.

The term comes courtesy of Harvard Business School's Joe Bower, who wrote the 2007 book The CEO Within: Why Inside Outsiders are the Key to Succession Planning. Hall is a variant of the model CEO candidate described (perhaps in his case the order of the words would be flipped). Inside outsiders are "people from the inside of the company who somehow have maintained enough detachment from the local traditions, ideology and shibboleths that they have retained the objectivity of an outsider," Bower wrote. "The successful CEO from inside must be able to look at his or her corporate inheritance as if he or she had just bought the company."

Bower's book predates the great financial crisis. In the turmoil of the past several years, the instinct to go outside to bring in a radically different perspective has only grown. Booz & Co's annual survey of CEO appointments, based on a study of 2,500 companies, has found that true outsider CEOs were hired in 22% of cases in 2011, up from 14% in 2007. A bigger leap was registered in Europe, where 31% of new CEOs in '11 were outsiders compared with 14% in '07.

None of this really undermines a key finding of Bower's research, however, that "insiders do better, often much better, than outsiders when stepping up to the top job."

Another august British institution, the Bank of England, has also just appointed a new governor (a similar role to Fed chairman). The long-serving deputy governor, Paul Tucker, was seen as the favorite to step up. But in a dramatic announcement it was revealed that the current governor of Canada's central bank, Mark Carney, would instead be taking over next summer.

A Canadian, running "the old lady of Threadneedle Street"—are such things possible? Well, yes they are. So this is a classic case of bringing a complete outsider in to shake things up a bit, isn't it?

Well, no, not really. Consider: Carney is a familiar and established figure on the global financial scene. He has a clear understanding of what central banking entails and what international markets expect. What's more, his Masters and PhD are from Oxford, and he worked for a time with Goldman Sachs in London. He has a British wife, and children with dual nationality. He's practically a Brit! (And will indeed adopt British citizenship on taking up the post.) So Carney, too, is much less of an outsider in this new role than might seem to be the case.

That's a good thing, by Bower's lights. Crises sometimes call for startling interventions, and the cool objectivity that only a detached outsider can bring. ("It is best to avoid outsiders if things are humming along fine," as The Economist's Schumpeter observed in a recent column.) But more often it is the inside outsider who can really make a lasting difference. That is why succession planning remains a core task for existing CEOs, and a key element of their legacy. Bosses should be working on developing potential successors from early on in their time at the top, inside outsiders who will manage to pull off the vital leadership balance of continuity and change.

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