Why recruiting a CEO internally can lead to greater growth

The business world has long debated whether it’s best to recruit a new CEO from within the firm to tap that person’s organisational knowledge and experience, or to look outside for a new face who can bring a different outlook and novel ideas.

The capable internal candidate or a breath of fresh air? The well known pair of hands or a dynamic newcomer? 

Prior research and the history of CEO hiring from within and without has yielded mixed results. There have been great successes and crashing failures in both promoting from within and recruiting from afar. 

How a combination of experiences translates into pursuit of growth  

A new study co-authored by Professor Yasemin Kor of Cambridge Judge Business School (with Professor Danchi Tan at National Chengchi University) addresses this issue by focusing on a specific but pivotal issue in selecting a new CEO: when is firm-specific managerial experience helpful versus harmful in the pursuit of growth opportunities?  

The study published in the ‘Journal of Management’ concludes that higher rates of growth opportunity pursuit can be achieved when CEOs’ firm-specific experience is combined with versatile managerial experience – such as roles in related industries, international exposure, and multiple functions such as finance, marketing and operations. Such broader experience alleviates the ‘growth-constraining effect’ of CEOs with extensive experience inside the firm who “tend to be committed to the status quo” and more resistant to uncharted territory.

“Versatile experience is likely to broaden the perception of new opportunities and enrich managerial ability of CEOs with in-depth firm knowledge,” the study says. “These CEOs perceive lower risk of failure and are more willing to pursue growth where resource reconfiguration is needed.”   

Yet it is “important to note that versatile experience is different from experience diversity,” because the latter fails to distinguish the specific contexts in which CEOs gain experience. The authors add that versatile experience in itself is often not sufficient for the pursuit of new growth, but only when combined with in-firm expertise.

It is the bundle of managerial experiences that is likely to shape the CEOs’ human capital and their perception, ability, and motivation to pursue new growth.”

Why recruiting a CEO is more complex than merely internal or external

Given the inconclusive prior research of whether it’s best to recruit a CEO from inside or outside, “researchers might have been asking the wrong research question,” says the study, which is based on publicly listed US food manufacturers during the period 1997 to 2007.   

“The food industry and this period of time are particularly well suited to the study of this important issue,” says co-author Yasemin Kor, Beckwith Professor of Management Studies at Cambridge Judge Business School.    

“Our study focused on growth opportunities in a way to gain new insight to the question of whether a CEO from within a firm is preferable to an outsider, and the food manufacturing sector during this period was facing new consumer demand for organic products so there were clear opportunities for growth. But at the same time pursuit of these opportunities faced a difficult and lengthy transition from conventional agricultural methods to organic, including investment in new organic supply chains and dealing with organic farmers – so CEOs in this sector needed to weigh growth opportunities against significant investment and other costs.”   

Study examines entire managerial career of CEOs

The study examines the entire managerial career of the selected CEOs, while related prior research has usually focused only on a smaller portion of their careers such as the past 5 years.

It focused on 46 food manufacturing firms, and following extensive research the authors were able to identify 26 organic acquisitions out of 1,514 acquisitions made by food firms in the study sample. In addition, they identified 31 greenfield investments made by food companies by developing their own organic food brands and products.

In conclusion, the study says:  “Prior research offered competing theory and mixed evidence regarding the benefits of firm-specific experience. Our resolution is to suggest that the value of such experience depends on the other experiences it is combined with. We theorised and found evidence that firms can escape growth-constraining effects of firm-specific managerial experience when CEOs also possess versatile experiences.”  

Practical implications for firms in choosing CEOs   

Co-author Yasemin Kor explains:  “Versatile experience increases the versatility of CEOs’ human capital only when it is combined with firm-specific experience. This means that at least some of the versatile experience should be gained in the focal company (in-firm context). If all of a CEO’s versatile experience is gained externally (in another firm), the CEO suffers from insufficient knowledge of the company and the synergistic effect disappears. Willingness and an ability to pursue a growth opportunity requires a broadened imagination and perceptiveness to new opportunities, but also an in-depth understanding of the capabilities of the firm. To be able to marry the two, some of the versatile experience has to be gained in the current firm.   

“A practical implication of our study is that a firm could boost its growth potential when it grooms managers who have both firm-specificity and versatility in their human capital, so we hope our research spurs further discussion about the nature of managerial experiences that best help firms capitalise on their resources and growth capabilities.”   

 The study – entitled “Interactive effects of CEOs’ firm-specific experience and versatile experiences on pursuit of new growth opportunity” – is co-authored by Professor Yasemin Kor of Cambridge Judge Business School and Professor Danchi Tan of National Chengchi University in Taiwan.