UK: Heller on Management - Outsiders' inside track to the top.

UK: Heller on Management - Outsiders' inside track to the top. - Increasing pressure on CEOs to perform is leading many companies to appoint an outsider to the top job rather than groom their own internal talent, says Robert Heller.

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Last Updated: 31 Aug 2010

Increasing pressure on CEOs to perform is leading many companies to appoint an outsider to the top job rather than groom their own internal talent, says Robert Heller.

Chief executives throughout the land should have started to worry when Roger Leverton left Pilkington. Though a well-versed, right-minded and good manager, Leverton, the board decided, had moved the company forward too slowly. At Sears, too, Liam Strong lost his struggle for success.

At United Utilities, Brian Staples bit the dust. What's going on?

Pressure for performance is being felt as never before - witness how swiftly institutional investors rounded on BT's Sir Peter Bonfield, some even demanding his head over the MCI merger hiccoughs. Life at the top is no easier in MCI's own country. Three Apple CEOs in four years have walked the plank. AT&T hired John Walter as heir apparent, only to pull the rug from under his feet.

If the firing mechanism is in good order, the hiring one evidently isn't.

The better the latter, obviously, the fewer we see of the former. Yet boards can be wantonly careless about this most conspicuous appointment.

Several giants, among them Coca-Cola and Gillette, have 65-year-old-plus CEOs soldiering on indefinitely for lack of suitable internal successors. And when hiring from outside, AT&T discovered a little too late that Walter lacked 'intellectual leadership'.

At Pearson, new girl Marjorie Scardino has tempted fortune by vowing to double the share price in five years after raising profits at least 10% annually. Scardino's arrival is one answer to a basic hiring question: for best results, do you appoint an insider or an outsider? Scardino, having successfully run a Pearson subsidiary, can claim to couple the outsider's critical eye with the insider's understanding. Certainly, one sovereign advantage of splitting corporations into autonomous divisions is that individual business bosses can come under much closer and more testing examination than the best of head-hunters can supply. But well-managed companies should know their inside talent thoroughly, anyway.

In theory, the board dutifully sees that enough of such talent is developed.

In practice, though, outsiders are on the march: nearly a third of the US top 1,000 companies are run by imports, against 9% three decades ago.

Even those companies that are doing well are looking outside for help.

Xerox's appointment of Richard Thoman, IBM's chief financial officer, is one example. And two years ago, Walt Disney, appointed Michael Ovitz, the top Hollywood agent to the position of president.

Importing boards presumably hope that outsiders will bring a different, stronger direction of energy. An internal crisis that causes abrupt replacement certainly gives outsiders carte blanche to sweep away bad managers, poor practices, loss-making businesses, superfluous assets and people - and all the other legacies of corporate ineptitude. An insider, even if crisis has supervened, will be expected to preserve the status quo, with which everybody is comfortable.

Boards often connive at situations in which no succession planning takes place until retirement looms. They don't insist that internal talent be reinforced by external appointees. They don't ensure that sitting bosses delegate authority to their ablest colleagues, share strategic decision-making widely, and allow people to show their paces (improving both management and succession). And they don't make succession a top priority. Not all boards have been too hasty in pushing their top boss out. One or two have been too slow, compounding their problems by allowing failed incumbents to continue beyond the point of no return. A decade's damage to IBM under insider John Akers set the stage for outsider Lou Gerstner to mount a financially impressive turnaround, although the company has grown just 20% in the booming 1990s. For most companies, though, performance pressure is building. Whatever the merits of Leverton's individual case, the Pilkington board was right in principle. The pace of change is too rapid to allow chief executives the benefit of much doubt.

The findings of Nitin Nohria and Rakesh Khurana, both of Harvard Business School, do encourage the wisdom of some outside appointments, but only when the previous incumbent has been sacked. Studying The Effects of CEO Turnover on Large Industrial Corporations, the pair concluded from 222 CEO successions between 1978 and 1994 that having insiders take the reins after peaceful retirement had 'little effect on performance'. If an outsider arrives after the last man's comfortable retreat, though, the outcome tends to be less dynamic still.

Nohria and Khurana wonder why CEOs in their study didn't have greater impact on performance, and pointed the finger at inherent limitations. ('Their constraints are many: company values and procedures, pre-existing lines of business, currently accepted management practices, and bureaucracy.') But their research dealt in averages. The exceptional appointee, inside or outside, a Lord Simon or an Archie Norman, overrides all constraints to perform exceptionally. Shareholders should take violent exception to any board which settles for less.

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