UK: WHEN THERE'S ROOM AT THE TOP. - The need to appoint outside chief executives, says Robert Heller, is a sure sign of failure.

Last Updated: 31 Aug 2010

The need to appoint outside chief executives, says Robert Heller, is a sure sign of failure.

The spate of axed chief executives, and their replacement by outsiders, could readily look like a major trend. If so, not only may heads that wear the crown lie uneasily, so should those of others whose promotion to leading roles may never materialise - unless, that is, they are anointed as somebody else's outsider.

Relax: the instability is more apparent than real. For every boss who bites the dust, hundreds journey into safe retirement. For every company that hunts an outside head, scores promote insiders: possibly a Buggins taking his turn, maybe a man who, like an ideal new product, will surpass his predecessors by being both different and better.

The male noun and adjective may be politically incorrect, but they're factually correct. Out of 1,000 top American CEOs surveyed by Business Week just three are women. That 0.3% shows no change: nor do the other characteristics of the occupants of the top jobs - average age 56, length of tenure 8.5 years, 21 years averaged with the beloved company, fledged most likely in finance or accounting.

The British profile would be similar. The magazine argues that 'CEOs with the outside edge (are) in, as never before'; but the cases in point, from Louis V Gerstner at IBM to Charles M Harper at RJR Nabisco, are plainly exceptions. So are Britons like Liam Strong, who went from BA to Sears; or John Parker (ex-Harland and Wolff) and Nick Salmon (GEC Alsthom), who moved into the top spots at Babcock International.

Such spots are almost invariably hot. Chief executives are generally executed, and successors imported, when companies have run into serious problems, often over many years. What US cemetery owners call 'before need provision' is applied only rarely. Then replacement is made while the company is in apparent rude health: not when it's sick unto death.

The case for turning outside to save the patient is powerful. The board appears assertive and active (its members, of course, have usually been supine for years - but let it pass). The external choice marks a clean break with the soiled past. The outsider has a licence to kill, and a relevant track record.

The relevance usually lies in a previous turnround - like Gerstner's work in hoisting RJR Nabisco's head above its oceans of debt, or Harper's brilliance in transforming ConAgra, a dull food processer, into a fast-moving consumer goods force. Choosing horses for courses is sound policy. But the illogic is obvious. The turn-round kings had to start somewhere. At one time they were like everybody else: faces in the executive crowd.

Outside the computing industry and Texas Instruments, who had heard of Peter Bonfield before ICL saved itself by his appointment? Inside every company that turns outside there's latent talent of a high, maybe the highest order. The external replacement of an ousted boss reflects double failure of the system: first, it failed to evolve the right top management and to direct that management towards achieving the right results: second, it failed to develop and exploit its most valuable human resources. The dual failure is highlighted by a simple question. Would any company deliberately adopt a policy of always appointing its chief executives from outside? Obviously not: the unmistakeable signal sent to able insiders would be counter-productive, and the chances of developing a coherent long-term strategy and culture would wither away. The outside appointment is not a plan, but an accident.

Too many companies, alas, are accidents waiting to happen. From the investment viewpoint, though, accidents are opportunities. I recently heard of a happy investor who loves buying into companies that slash their dividends. The shares have probably been oversold: the management has bitten the bullet: there's nowhere to go but up. By the same token, the new corporate broom promises to sweep away the awful past.

One large company study found that, after 18 months of outsider tenure, you can expect a two-thirds rise in the share price - at least in America. The Parker-Salmon duo at Babcock were unkindly welcomed with a 20% fall in the shares: but for them, of course, it's early days. And the US share surges are essential to justify the gigantic pay packages on which rich outsiders like Gerstner and Harper naturally insist.

The high cost of external appointees is a minor argument against them. The major objection is that they result from the failure of a system that will fail again without radical repair. Even if they have the inclination, the outsiders may not have the time for lasting reconstruction. Harper, at 66, is exceptionally old: but Gerstner, at 51, has under a decade ahead at IBM: Michael Jordan, the new broom at Westinghouse, is 57 - and so on.

Yet insiders may not come any younger. The British-born Alex Trotman is replacing a 68-year-old at Ford Motor: Trotman is 60. This is one indication that the appointment of chief executives may be fundamentally flawed, inside or out. In an era when companies need perpetual rejuvenation, they require at all levels people who are capable of leading the whole company - and in their own relative youth.

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