Ever since Jim Collins’ “Good to Great” came out a decade ago, it has been the received wisdom that the best CEOs are those that rise up through a corporation are better than outsiders who are parachuted in. But is this true?

As part of an article on a different topic (Is Lincoln really a good model for leaders?), The Economist’s Schumpeter column recently commented on two studies that have something very interesting to say on this important topic. The conclusion is compelling: it depends! It depends specifically on where your company is in its business cycle, and who the leader actually is. Read the original Economist article here (subscription may be required), or an extract below:

Lincoln and leadership

Outsiders can make the best leaders—and also the worst
Dec 1st 2012

In his new book, ‘Indispensable’, Gautam Mukunda, of Harvard Business School … examines one of the liveliest debates in modern management — whether insiders or outsiders make better bosses. Before the financial crisis the consensus was strongly in favour of insiders. But it is shifting, partly because so many insiders made a hash of things and partly because companies are casting around for a way to reignite growth. In an annual study of 2,500 companies Booz & Company, a consultancy, calculates that the proportion of chief-executive posts going to outsiders rose from 14% in 2007 to 22% in 2011. In Europe the share went from 14% to 31%. …

The better angels of our nature

Mr Mukunda divides leaders into two types, ‘filtered’ and ‘unfiltered’. The filtered are known quantities: insiders who have been subjected to a succession of tests designed to reveal their strengths and weaknesses. The unfiltered are enigmas: outsiders like Lincoln who have never been tested by high office; insiders like Winston Churchill who have fallen out of favour; or transplants like Mr Carney [a Canadian who has taken over at the Bank of England] who have made their reputations in alien organisations. Filtered leaders tend to make little difference: the other insiders on the shortlist might have done just as well. But unfiltered leaders can make a huge difference, sometimes for the better as Lincoln and Churchill did, but more often for the worse.

Another recent book from the HBS stable, William Thorndike’s ‘The Outsiders’, reinforces Mr Mukunda’s argument about the possible advantages of unfiltered leaders. Mr Thorndike examines eight bosses whose firms outperformed the S&P average by more than 20 times over their business careers and finds that they were all outsiders who brought fresh perspectives to their industries. Katharine Graham of the Washington Post was a widow who had not had a paid job for years, Bill Anders (General Dynamics) was a former astronaut, Tom Murphy (Capital Cities) had never worked in the media before he took over a struggling television station and Warren Buffett (Berkshire Hathaway) is Warren Buffett.

But for every successful outsider there are a dozen failures: think of Carly Fiorina at Hewlett-Packard, John Sculley at Apple, Bob Nardelli at Home Depot, Richard Thoman at Xerox or Jeff Skilling at Enron. Al Dunlap leapt from company to company, cutting jobs and boosting short-term profits as he went, until the Securities and Exchange Commission forced him to put his chainsaw away. Booz points out that in 2009-11 34.9% of outside bosses were sacked, compared with only 18.5% of insiders.

This suggests that it is best to avoid outsiders if things are humming along fine. It is much easier to go from good to bad than it is to go from good to great. But if things have stopped humming — if your company is in crisis, like General Motors, or your industry is being reshaped, like telecoms — then you should look for an outsider. The standard method is to choose a star from another organisation, but many turn out to be duds. One alternative is to appoint an ‘insider-outsider’, such as a high flyer who has left to do something else. Tony Hall, appointed to the BBC’s top job to replace a man ousted after 54 days in the post, fits that bill: he was a BBC man who left the corporation to run the Royal Opera House. Another option is to draft in someone to do a senior job for a while before deciding whether to give him the top slot. Mr Mukunda suggests that you take informal soundings from any prospective hire’s colleagues rather than rely on formal interviews. The reason why companies tend to bet on insiders is not that they think they might be ‘clothed in immense power’ but that they know what they look like in their underwear.

Source: The Economist, 1 December 2012

TomorrowToday Global