CEO replacement: An inside job?

Dr Patrick McColgan, senior lecturer in Finance,  looks at recent examples of high profile hires to discover if it’s better to look inside or outside the organisation for a new CEO…

For any company replacing leaders can be a challenging business, but for those which are publicly listed it can be particularly difficult.

One wrong move can see vast sums knocked-off a company’s share price, which is something Burberry Plc would have been acutely aware of last week when its CEO designate, Christopher Bailey faced city analysts for the first time.

Coming a month after it was announced he would succeed Angela Ahrendts in 2014, and Burberry’s share price subsequently fell 7.6%, his appearance seemed to have reassured at least some investors. The current Chief Creative Officer’s initial briefing on updated results was viewed positively and, as a result, the share price increased 1.8% against an increase in the FTSE 100 index of 0.2%.

While the initial share price decline was largely due to the planned departure of a very successful CEO, many also voiced concerns over Mr. Bailey’s suitability for the role.  As an internal appointee with no previous experience in running companies, Mr. Bailey’s selection was initially viewed sceptically by investors.  Moreover, the decision to combine the roles of CEO and Chief Creative Officer raised concerns over the ability of any one individual to manage the workload of both roles.

So what should companies look for in a new CEO, should they appoint from within or look outside their current teams for new talent?

Replacing CEOs from within the current management team as part of a pre-planned succession process, as was reportedly the case at Burberry, is often a preferred option for companies.

Following strong performance at Burberry, an internal candidate involved in the development and implementation of the firm’s policies has the attraction of offering continuity.  Moreover, hiring externally is often seen as damaging to the incentives of internal directors and frequently leads to an increase in turnover of senior staff.  Indeed, initial reports of Christopher Bailey’s promotion to CEO speculated that he was given the job specifically to stop him leaving the company.

Replacing CEOs with externally hired successors is more common following poor performance and the involuntary departure of the incumbent, and it is also more likely when organisational change is required.

Harriet Green’s appointment as CEO of Thomas Cook Plc can be seen as a case in point.  Mrs. Green got the job after cold-calling Chairman Frank Meysman and despite having no prior experience in the travel industry.  While her appointment has been followed by a number of store closures, employee layoffs, the sale of non-core operations and a restructuring of the firm’s debts, it has been rewarded with a 750% increase in Thomas Cook’s share price Since July 2012.

But appointing from outside the firm is no magic bullet, and to some degree Harriet Green’s appointment breaks the mould.

Externally, hired CEOs often fail in their jobs given a lack of prior industry experience.  Halifax Bank of Scotland’s eventual rescue by the now renamed Lloyds Banking Group and the UK government is, among so many other factors, often attributed to the power given to Andy Hornby.

A former retail executive who was appointed CEO in 2006,  Mr. Hornby gained experience working as head of retail banking at Halifax since 1999, but was still felt to lack an understanding of risk in the banking industry.

The recent appointments of Ross McEwan at RBS and Antony Jenkins at Barclays also demonstrate the belief finding a new CEO, with the appropriate experience can often only be gained with an internally hired candidate who knows the business hierarchy.

While evidence is mixed and it’s difficult to predict whether Christopher Bailey will prove to be a success at Burberry,  his successful partnership with and apprenticeship under Angela Ahrendts puts him in a strong position.

How much of a handicap his lack of board level experience will prove to be remains to be seen, but this and the company’s intention of strengthening the supporting management team to aid his transition, should stand him in good stead.

What are your thoughts on replacing CEOs? Is it better to bring in new blood, or to look within for talent? Let us know your thoughts in the comments below….

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