Internal CEO succession minimises risks and builds continuity. Boards should develop talent pipelines long before a leadership change is required.
CEO succession is one of the most consequential decisions any board makes, shaping organisational performance, culture, risk and stakeholder confidence for years to come. Boards often need to decide whether to promote from within or recruit externally for the top job.
Having a pool of qualified internal candidates to choose from can signal that the board has discharged its duties well in terms of talent development and thinking ahead about culture and strategic continuity. These are all hallmarks of good governance.
Arguments for internal succession
Boards have a lot of information about the executives who already work in an organisation — their ethics, decision-making styles and how they perform and respond under pressure. This naturally means less uncertainty if it wants to consider one of those candidates moving forward. Boards can base their decisions on direct evidence, rather than references or projections.
Internal appointments also tend to be more stable over the long term, with lower failure rates and reduced risk of turnover.
Internal candidates ensure a high level of cultural and strategic fit. The cultural capital an internal candidate has developed over their time within the organisation means they embody its values. They know how to interface with different stakeholders around the organisation and they know how to maintain morale and trust — priceless, intangible assets that could be quickly lost in an external hire that was misaligned in some way.
Even with the best plan and succession and talent identification process, it’s difficult to be able to provide the board with complete reassurance on all those things. There are many cases where the appointment of an external candidate has thrown key supplier or client relationships into turbulence because that inherent knowledge of how the organisation works has been lacking.
Of course, the board must consider a variety of factors. There are some circumstances where the risks associated with an external candidate are outweighed by the potential benefits of having a different perspective. These include situations where an organisation is leaning into huge headwinds around business model disruption (for example, Nokia, Ford) or crisis or turnaround situations (for example, Uber, AustraliaPost).
But the weight of the evidence seems to suggest that identifying a really well-qualified internal candidate will likely bring lower risk and greater benefits.
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Proof in the pudding
The data points in that direction as well.
Internally promoted CEOs often outperform or match external appointees. Multiple papers have identified that during the COVID-19 crisis, insider CEOs delivered significantly higher return on assets than outsiders. During that moment of crisis, the internal knowledge and relationships created resilience and allowed for stability under very difficult operating conditions.
There are situations where the outlook is a lot more ambiguous and there are big strategic choices to be made. Maybe that’s where you would look to an external perspective. But if you’re in a board position, it’s good to have the luxury of choice.
A smooth handover is the payoff as a result of that disciplined talent investment and a deliberate approach on how to prepare for it. That’s not to say there’s a predestined outcome, but you’ve got a range of options and you’re thinking about how to prepare that person for the next step from a pool of qualified candidates.
If an external candidate is the choice that’s made, the immediate questions for stakeholders are, “What is the underlying problem this choice was made to solve?” And “What does that choice reveal about the board’s view on the future of the organisation and what's required?”
The internal choice is not necessarily just playing safe. In many cases, the board is thinking long-term about safeguarding value.
Aspiring CEO program
The Melbourne Business School has just run its pilot Aspiring CEO program in partnership with Deloitte. The three-day program is designed for individuals whose employers have earmarked them to potentially step up into that new role.
CEOs are often promoted based on their competency in their current roles, but they are not necessarily given the tools to lead in a highly complex role where they need to make decisions that are largely future-oriented.
Our Aspiring CEO and New CEO programs help to address this gap, to make sure people who are technically brilliant have the necessary tools to step up to the CEO role, which demands a different leadership skillset. It’s a good way of fostering that development pipeline so that when the board does reach the decision point about their next CEO, there are some qualified internal candidates to consider.
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