Study: Companies better off hiring CEO from within in the long term

Jan 20, 2010

When a company wants to appoint a new CEO for strategic changes, they would be better off in the long term by promoting someone from inside the company rather than hiring someone from the outside, according to a new study from Rice University's Jones Graduate School of Business.

The study, "Once an Outsider, Always an Outsider? Origin, Strategic Change and Firm Performance," has been accepted for publication in and was co-authored by Anthea Zhang, the Jesse H. Jones Distinguished Associate Professor of Management at Rice.

The study looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside. However, in later years, internally promoted CEOs outperformed externally hired CEOs.

"Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes," Zhang said. "Therefore, the relative advantage or disadvantage between 'inside' and 'outside' CEOs in initiating and implementing appropriate strategic changes is not seen immediately."

However, after three years, it's clear that inside CEOs fare better than outside CEOs, according to Zhang. "When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for and divestment dry up. Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm's long-term competitive advantage," Zhang said.

"From the implications of this research, it's clear that companies may be better off in the long term led by CEOs groomed from the inside as opposed to CEOs from the outside," Zhang said. "Boards of companies need to recognize that hiring an outside CEO poses greater risks to the company's performance in the long term."

Explore further: Rural loss and ruin can be avoided

More information: To read the complete study, go to www.rice.edu/nationalmedia/multimedia/ZhangCEO .

add to favorites email to friend print save as pdf

Related Stories

Workers Get Paid More When They Work For Powerful CEOs

May 19, 2006

For workers at publicly held companies, it literally pays to have a very powerful boss. A new study found that entrenched CEOs – those who have more control rights in their company than all other shareholders combined -- ...

Recommended for you

Children's book explores Really Big Numbers

1 minute ago

A new children's book written and illustrated by a Brown mathematics professor Richard Schwartz takes readers on a visual journal through the infinite number system. Schwartz hopes Really Big Numbers will ...

Shrinking dinosaurs evolved into flying birds (w/ Video)

18 hours ago

A new study involving scientists from the University of Southampton has revealed how massive, meat-eating, ground-dwelling dinosaurs evolved into agile flying birds: they just kept shrinking and shrinking, ...

Congressional rift over environment influences public

21 hours ago

American citizens are increasingly divided over the issue of environmental protection and seem to be taking their cue primarily from Congress, finds new research led by a Michigan State University scholar.

User comments : 0