Last week, two CEO announcements brought cheer to the stock markets. At home, Sashidhar Jagdishan’s succession at HDFC Bank as the next CEO, and globally the announcement that Ford COO Jim Farley was taking over the reins of the company.
These bits of news should not have caused any surprise. After all, a 2018 PwC study of 2,500 of the world’s largest companies found that 83 per cent of successions involved internal candidates.
So why were the markets hailing these successions? Especially as many an internal succession has not paid dividends. Remember GE’s Jeff Immelt and former British Prime Minister David Cameron? They were both carefully picked after a long wait under their highly successful predecessors.
On the other hand, there are shining examples of insiders Satya Nadella and Sundar Pichai, who have taken Microsoft and Google to new heights since they took over. We also witnessed in recent times large Indian IT Services companies like CTS, Infosys, Wipro back outsiders whereas TCS stuck to its internal succession tradition.
Although the insider vs outsider conundrum is not new, the dynamics of choosing an insider is getting more complicated.
Context rules
In most cases, when an insider gets promoted, it reflects two things. One, the Board is happy with the organisation context, and two, continuity is preferred over radical change. But sometimes, there is collateral damage. For instance, in 2008, GlaxoSmithKline allowed its three internal candidates to compete in public. Finally, when the successor was chosen, the other two contenders left despite substantial shares and board seats offered as inducements to stay on.
Data also suggests that when there is a reactive situation like a CEO stepping down under pressure, Boards prefer outsiders. In 2019, 13 per cent of CEOs among the S&P 500 list quit under pressure. Outsiders replaced 71 per cent of them. Clearly, these enterprises weren’t continuously engaged in succession planning or prepared for non-anticipated disruptions.
The hybrid solution
Some organisations take the middle path. To avoid causing conflict among peers, they bring in someone from the company who has been away on international assignments. That’s a hybrid model of promoting somebody internally and yet bringing somebody external to the ecosystem so that churn is minimised. For organisations wanting to play safe, that’s in vogue too.
Discounting internal talent
“I regret the choice of my successor,” a former CEO once said to me. “I thought my internal talent was only 60 per cent ready and hence decided to hire from outside. Now they have lost the internal contender who ran sales so well, and the outsider has taken the company to the brink.” Like him, many of us discount our colleagues’ abilities looking at their current roles. Maybe we compare them to the inflated image of the Incumbent, who has been into the role for a while. I wonder how many of our leaders are graduating in CEO Factories; we forget that they are all busy running sales, finance, marketing, operations and will obviously take time to graduate to the CEO’s role.
The incumbent’s vote
It might be crucial for the outgoing CEOs to stick their necks out and tell the search committee their preferences and substantiate it. It will have its shades of conflict of interest but one should still need to take that chance as incumbent CEO would have seen their colleagues at work and would have a ringside view of the capabilities and potential.
When Aditya Puri said much ahead of RBI approval that “our potential successor has been with us for 25 years at least in my mind”, he was definitely making his preference known.
Outgoing CEOs while choosing their successors can sure consider the Shakespeare quote, No legacy is so rich as honesty.