Hewlett-Packard Snarls Show Peril of Outside CEOs: The Ticker

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By George Anders

Hewlett-Packard Co.’s latest leadership turmoil isn’t just an embarrassment for the world’s biggest technology company. It is a stark reminder of the risks involved when companies keep seeking heroic outsiders to take command instead of developing top talent internally.

Less than a year ago, Hewlett-Packard announced that former SAP AG software executive Leo Apotheker would be its next chief executive officer. Directors seemed undeterred by the fact that two previous outsider CEOs – Carly Fiorina in 1999 and Mark Hurd in 2005 – had arrived with great fanfare, only to be sent packing a few years later when the board soured on each.

Apotheker’s tenure so far has been a shambles. Growth has slowed; earnings are weak; investors don’t like his acquisition plans, and his proposal to spin off the personal-computer business has sent the stock reeling. Hewlett-Packard shares jumped 6.7 percent yesterday after Bloomberg broke the news that the board is meeting to consider ousting him.

The broader lesson here goes beyond Apotheker’s own shortcomings, whatever they might be. Any hunt for an outside CEO tends to be a hasty courtship, in which directors may be enchanted by a candidate’s persuasiveness, without taking a slow, dispassionate look at a newcomer’s full strengths and weaknesses.

Rakesh Khurana, a professor at Harvard Business School, pinpointed these risks a few years ago in his book “Searching for a Corporate Savior.” As he wrote, outsiders who dazzle in boardroom job interviews turn out to be on far shakier ground when their on-the-job duties call for detailed industry knowledge or an ability to connect with the existing management team.

In dire situations, a newcomer’s fresh perspective can be valuable. Lou Gerstner’s success at International Business Machines Corp. in the 1990s is a case in point.  At more stable companies, academic studies show, the home-grown succession candidates tend to fare best.

As other boards puzzle over CEO succession in months ahead, they might do well to look at examples such as Hewlett-Packard and Yahoo Inc., which recently fired its externally recruited CEO, Carol Bartz. The hazards of turning over command to strangers are clear enough that directors don’t need to contribute any more data points.

(George Anders is a member of the Bloomberg View board of editors.)

-0- Sep/22/2011 18:36 GMT