Is Tesco right to promote from within?

If internal CEO appointments perform better, statistically, why are more UK firms looking further afield?

Last Updated: 06 Nov 2012

Last week, Tesco appointed international director Philip Clarke to succeed Sir Terry Leahy as CEO. Like Asda, it’s chosen to promote from within – whereas the likes of M&S and Morrisons have both recruited new CEOs from outside the ranks. So which is the better approach? Well, a recent study by consultancy Booz & Co found that ‘insiders’ have out-performed ‘outsiders’ over the last decade. And yet the UK – unlike most big developed countries – appointed more outsiders in 2009 than in the previous year. Should we be alarmed?

Booz, which has been analysing CEO succession at the world’s 2,500 largest companies for the last decade, reports that the global turnover rate has actually been pretty flat for the last five years, at about one in seven. But in 2009, the proportion of forced turnovers (i.e. chief execs pushed out of their job) actually declined in every major region; overall, it dropped to 3.3%, the lowest figure since 2003. That might seem surprising, given the general climate – but Booz suggests struggling companies may have already booted out their boss in 2008 when the recession struck (and the research suggests UK companies are quicker to turf out under-performers than anyone else).

Another notable global trend is that more big companies are promoting insiders to the top job: 80% of CEO appointments in the last decade have been filled by internal candidates. And the stats support that strategy: Booz reckons insiders have averaged annual shareholder returns of 2.5% over the last decade, compared to 1.8% for outsiders. They’re also more likely to stay longer, and less likely to get the boot.

Now admittedly there’s a degree of circularity here. As Booz VP Richard Rawlinson points out, stronger companies typically don’t need to recruit from outside. Tesco’s a good example: it had four or five strong internal candidates to fill Sir Terry’s capacious shoes. Whereas Sir Stuart Rose of M&S clearly didn’t feel he had any, ultimately forcing him to poach Marc Bolland from Morrisons. (Incidentally, the stats suggest that weak companies tend to do better if they appoint an outsider, but only for the first few years – suggesting that the right person for a turnaround may not be the right person to run the company in the longer term).

Yet while there’s a clear trend to appoint more ‘insider’ CEOs globally, that’s not actually true of the UK – last year, the number of outsiders hired here shot up by nearly 10%. The gloomiest interpretation is that we have more weak companies in need of external answers, although Rawlinson suggests a more charitable explanation: that the UK is just a more open talent market than most countries, so UK companies tend to cast their net wider in search of top leaders (the Royal Mail being one recent example). But either way, this research suggests that looking outside the ranks for your next CEO won’t necessarily leave you any better off in the long run.

In today's bulletin:

We will make BP pay, says Obama (but what about everyone else?)
No cause for cheer as unemployment hits 2.47m
Sainsbury positive despite slowest sales growth in five years
A Traveller’s Tale: Recessionary Rome is remarkably robust
Is Tesco right to promote from within?

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