Succession planning: Insiders v Outsiders


By Jeremy Daniels –

There are a number of essential elements to a successful CEO succession. Each dimension must be managed to mitigate the risks inherent in a leadership transition effectively. The best outcomes can be achieved by having best practices in place to manage the changes in a continuous process that will ensure that a company leader and board of directors are operating at peak effectiveness and efficiency. A thoroughly planned and executed succession plan is the key to a successful transition in leadership. Successful enterprises manage this process in advance with a defined set of measures.  

A well-defined strategy will have a list of highly capable candidates ready to assume the CEO position whether through a planned or unplanned CEO departure. In either case a succession plan should be in place before it is actually needed – a full consideration of external versus internal candidates can be vital to company success and also a plan of how to tackle challenges that arise from either scenario is crucial. 

A major part of managing this change is timing – i.e. whether the change in CEO is planned or unplanned. In the case of a planned departure, for example a CEO retirement, an internal candidate can bring a range of benefits to the company. An internal candidate presents the least risk to the company in certain regards as they are most often accustomed to the culture and vision and typically they will have been demonstrating and utilising the competencies required to work successfully for the particular enterprise. Often internal candidates can be nurtured and well prepared to take over the CEO position in the case of a planned change. These circumstances allow enough time to identify and develop internal talent and implement a formal and structured assessment procedure towards evaluating and identifying the right candidates in advance. This method – if a suitably skilled candidate can be found – is typically the least costly to an enterprise.

Historically, a well-chosen internal candidate is the popular choice with stakeholders and can have a positive effect on stock prices at the time of announcement. A planned CEO vacancy being filled with an external candidate, on the other hand, can also have a number of advantages such as bringing fresh ideas, perspectives and energy to a company and also providing objectivity. However, external candidates can be the most costly choice – not just in terms of compensation – but in terms of the costs of getting accustomed with the company and establishing themselves as the new leader of the company. Historically, an outside CEO is less likely to stay long term and has a higher risk of early failure. Additionally, an outsider can affect stock prices adversely if shareholders feel uneasy with the chosen external candidate. Of course in some cases the reverse can also be true. Care must always be taken when hiring external talent. 

In some cases there may be an unplanned change in CEO through an emergency departure -for example due to unforeseen termination, resignation or the current CEO may no longer able to fill the role through injury or worse. In these circumstances, again the internal candidate has the advantages of being familiar and established within the company as well as having an immediate understanding of the needs of the company. They are able to get to work in the CEO capacity immediately and this can have numerous cost advantages to the company. However, in many cases there are no viable candidates in the pipeline and the more sensible option might be to appoint an internal interim CEO until a more suitable candidate search can be carried out. Often a board member will take over as an interim CEO for the short term in this scenario. An external candidate in the case of an unplanned CEO vacancy can be the most risky to a company. There can be a number of surprises without the proper amount of time and planning – both for the candidate and the company – and this means more risk. Typically these kinds of changes are also most publicised and scrutinised by both the media and stakeholders and the uncertainty around the situation can have an adverse effect on the share price.