Here’s why South African companies appoint external candidates to fill CEO posts

As companies continue to grapple with the question of whether they should appoint top leaders from within, or whether it would be better to bring in someone from outside, research finds that there are distinct benefits in the long term of appointing external candidates.

“For many organisations, it is almost always instinctively preferable to make an internal appointment to the CEO role, because of institutional memory, knowledge of corporate culture, limited delay in the learning curve and the ability to hit the ground running, among others,” said Debbie Goodman-Bhyat, CEO of leading local and African search firm Jack Hammer.

But she said that data gathered by Jack Hammer in recent years, showed that 70% of CEO placements were external candidates. The balance of appointments came from the company making either an internal appointment, or the company importing an internal candidate from their international office.

While there are distinct benefits to appointing an internal candidate who was identified as part of a company’s succession planning strategy, there were also solid reasons for sourcing top leaders from outside the company, Goodman-Bhyat said.

Recent research, published in the January/March edition of the Health Care Management Review Journal, investigated the extent to which insider CEO succession versus outsider succession impacted an organisation’s competitive advantage.

It found that while any type of leadership change would result in short-term adverse impacts on a firm’s operational efficiency, “outsider CEO succession events closed the gap toward the competitive advantage frontier faster than comparable firms with insider successions”.

“There are, in our experience, certainly good reasons to bring an external candidate on board, which supports the conclusions from the aforementioned research,” said Goodman-Bhyat.

“Outsiders bring fresh thinking, they are able to take the company in a new direction, and initiate company turnaround or transformation which is less likely to occur when an internal successor takes over.

“And so sometimes, even when there is a solid internal successor, a board may nevertheless go through a search process as a market research exercise, and to do their due diligence – almost like getting external verification that their internal candidate is in fact the right appointment.

“This is also the case when the company has a strong transformation agenda, and their only internal successor is white. This presents an opportunity for the company to see what BEE talent they might be able to bring on board, in comparison with their internal candidate,” said Goodman-Bhyat.

She said that while the Jack Hammer data doesn’t represent a complete picture of the ratio of internal vs external CEO appointments – given that companies with a clear internal successor are less likely to approach a search firm – it does provide an indication of the reduced likelihood of an internal appointment when a company decides to do an external search.

“In an ideal world, companies will be building their bench-strength, ensuring multiple potential internal successors. These should include executives who are more recently appointed to the C-Suite and will drive fresh-thinking and innovation that typically motivates an external hire.”

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Here’s why South African companies appoint external candidates to fill CEO posts