Personnel decisions follow strategy, in the C-Suite as much as for the rank and file. While bringing in an outsider can be an advantage, it shouldn’t become the rule, Guido Schilling writes for finews.first.

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Sunrise and Credit Suisse have done it recently, as have Sulzer, Firmenich, AFG and Gategroup – chosen an outsider as Chief Executive Officer, or CEO.

A long-term comparison in «schillingreport» which examines leadership ranks of the 100 largest Swiss firms illustrates the trend: of new CEOs hired in 2015, 44 percent were recruited from outside the firm they now lead – a substantially higher number than in past years.

The only time the proportion of outsider CEOs was higher was during the financial crisis in 2009, when it reached 57. Normally, the measure fluctuates between 20 percent and 40 percent annually, but prominent recent hires like that of former Fresenius boss Ulf Schneider for Nestle run counter to the trend.

«If a firm isn't in need of a strategic overhaul, then internal candidates are favorable over outsiders»

This favoring of outsiders isn't concerning, since the average of external hires for CEO is relatively constant at roughly 30 percent. This illustrates that talent management for Swiss firms is reliable, despite short-term swings.

A long-term trend towards outsiders or an increasing preference for «the objective take from outside» cannot be discerned. To be sure, there are situations where external CEOs are the better choice. However, personnel decisions should follow structure, which in turn aligns with strategy, to cite Alfred Chandler’s thesis.

If a firm isn't in need of a strategic overhaul, then internal candidates are favorable over outsiders. Fewer resources are needed to show the new CEO the hire, and the risk of miscasting an executive to the top role can be minimized: the board will know top management candidates first-hand, and assess their potential and skills realistically.

An intact internal network can minimize friction, even if it will be a challenge for some to accept a peer in a new role as a superior.

«In the right environment, outsider CEOs can spur key changes to lead firms into new growth areas»

Opting for an outside candidate should also be motivated by overarching strategy. A modicum of stability in top management and board is helpful to keep a lid on any restlessness or disturbances created by the appearance of an outsider CEO – or channel it into something productive.

Ulf Schneider will find a strong value culture and a solid and broadly supported firm when he starts as the new Nestle CEO this month. At the same time, the former Fresenius boss can give Nestle’s health science unit – which the board sees as its future – crucial value and impetus from his previous role.

This illustrates that in the right environment, outsider CEOs can spur key changes to lead firms into new growth areas.

One of Switzerland’s biggest business success stories was written by outsider CEOs: Johnson & Johnson executive Ernst Tanner was hired by Lindt & Spruengli in 1993 after a series of successors to Rudolph Spruengli, who founded the chocolate maker, had failed.

«Outsider CEOs are typically not picked in rosy times when business is cushy»

Swisscom executive Calvin Grieder had a similar experience when he took over family-owned Buehler from Urs Buehler 16 years ago. At the time, the conservative firm desperately needed a clearer strategic positioning and cost cuts in order to return to growth. Grieder, then an outsider to the Uzwil-based firm, was hired, delivered and ultimately stayed at the top for 15 years.

These examples illustrate that outsider CEOs are typically not picked in rosy times when business is cushy, but when major economic and business challenges loom, in conjunction with a change in ownership, or when an unexpected CEO departure prompts a new beginning.

This was the case in the seven firms studied by the «schillingreport» that have changed their CEO four or even five times in the past ten years. It is evident that these CEOs cannot prevail as often as their predecessors due to the fraught environment they are dropped into upon their hire.

«This can be a double-edged sword»

The differences in tenure aren’t that great despite these swings: CEOs from within remain at the top for an average of 6.2 years, while outsiders stick it out for an average of 5.9 years – an appropriate amount of time to help a firm stabilize and grant the CEO enough time to make any strategic changes he or she plans.

In «succession emergencies,» the track record for outsider CEOs looks somewhat better. CEOs from another firm have logged more experience in other management environments and typically hold significantly more external board mandates.

This can be a double-edged sword: fresh perspective and outside board experience help a CEO to offer new ideas to firms and to break up corporate gridlock. However, too many outside mandates eat into a CEO’s time, leaving little time for the firm he or she is meant to lead. Whether an internal or an outside candidate is chosen for the CEO role: good planing in terms of strategic leadership is a must.

«It pays to have two or three outsiders as well»

Every board hopes to be able to roll out a long-term plan for CEO succession, but corporate life is often unpredictable. Unplanned vacancies and succession emergencies happen in the best of corporate families, be it for health or personal reasons, or the unexpected and sudden departure of a CEO.

This makes it all the more important for boards to keep a log of potential successors for key roles in top management, maintaining and updating it regularly. This can help mitigate the fallout from a sudden exit in the top echelon.

These logs should mainly list credible internal candidates, but it pays to have two or three outsiders as well – these days, strategic priorities change in a matter of years or months, and not decades.

Guido Schilling is managing partner of the Zurich-based executive search firm which bears his name. After studying business economics, he  held several executive roles in multinational corporations before joining the search firm as a partner in 1987. He is the founding president of the Rotary Club Turicum in Zurich.

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