Insurance News

In Most Cases, Companies Better Off Hiring CEO From Within

Posted on: January 27, 2010

Most organizations wishing to appoint a new chief executive officer for strategic changes fare better in the long term promoting someone from inside the company rather than hiring from outside “except for the insurance industry, in some cases “according to a new study from Rice University?s Jones Graduate School of Business.

The study, ?Once an Outsider, Always an Outsider? CEO Origin, Strategic Change and Firm Performance,? was co-authored by Anthea Zhang, the Jesse H. Jones distinguished associate professor of management at Rice.

The study looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside. In later years, however, internally promoted CEOs outperformed externally hired CEOs.

?Newly-appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes,? Ms. Zhang said in a statement. ?Therefore, the relative advantage or disadvantage between ?inside? and ?outside? CEOs in initiating and implementing appropriate strategic changes is not seen immediately.?

After three years, however, it?s clear that inside CEOs fare better, she said. ?When it comes to strategic change, outsiders typically are good at doing the rapid cost-cutting and divestment. As tenure increases, obvious opportunities for cost-cutting and divestment dry up.?

Because of their deep knowledge and roots in the firm, she said inside CEOs are more likely to initiate and implement ?strategic changes that can build the firm?s long-term competitive advantage.?

Ms. Zhang added that ?boards of companies need to recognize that hiring an outside CEO poses greater risks to the company?s performance in the long term.?

In the case of the insurance industry, however, Ms. Zhang told the NU Online News Service that this sector differs from the manufacturing industry, notably from a reputational perspective.

Particularly in light of the AIG bailout using taxpayers? money and also controversy over salaries, she said the issue for some insurance companies is perception and image.

?In this situation, for insurance companies it is important to bring someone from outside the company who is not related,? she said, explaining that she has been studying the topic for a number of years and has samples from several different time periods in the 1990s and 2000s.

From a reputational standpoint, she said hiring someone from outside the company can bring a fresh approach and help the organization?s standing.

Because the insurance industry and financial services sectors are more specialized, she noted they also need to hire people with deep knowledge about those businesses.

The study was co-authored by Ms. Zhang and Nandini Rajagopalan, professor of management and organization at the Marshall School of Business at the University of Southern California in Los Angeles.

© Copyright 2010 National Underwriter Property & Casualty. A Summit Business Media publication. All Rights Reserved.

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