CEO Jobs: Why Outsiders Get the Nod vs. Insiders

In 2012, struggling technology company Yahoo! (NASDAQ:YHOO) appointed former Google (NASDAQ:GOOG) executive Marissa Mayer as its CEO and president. Under intense competition from other search engines, Yahoo! had to make a game changing decision when appointing a new CEO. The board went for the outsider route instead of promoting from within.

A new study from PricewaterhouseCoopers concludes that hiring an outsider CEO seems to be the new normal when it comes to CEO succession at America’s biggest and best companies.

PWC defines an outsider as simply someone who did not work at the company before, as opposed to an insider who has worked at the company.

For 2015, PWC found that CEO turnover hit its highest level (17% of the largest 2,500 public companies globally changed their CEO), primarily because 2015 had a tremendous amount of merger and acquisition activity. Between 2012 and 2015, outsider CEOs made up 22% of all CEOs appointed during a planned succession.

While the majority of CEOs appointed in 2015 were insiders, outsider CEOs have caught up to them. Contrary to a past study from PWC that found a financial performance gap (regarding a company's earnings) between outsider and insider CEOs, which has since been narrowed.

Historically, companies have been reluctant when appointing outsiders to the top job, but in an age where almost every industry is facing major disruption, appointing an outsider with a different skill set can prepare a company for future change.

Per-Ola Karlsson, one of the study’s authors and a partner at Strategy&, a division of PWC, says that the telecommunications industry led the way for appointing outsiders, given the highly disruptive nature of the industry.

“Many companies or industries are going through significant changes. As industries go through significant change, quite often the skillset you need to compete in the future world is different from the past” says Karlsson.

Over time, appointing outsiders became more common in the case of a forced succession event, according to PWC’s study.

But now, according to Karlsson, boards actively include outsider candidates when it comes to CEO succession planning. The PWC report notes that outsider candidates often have the skills needed to take a company through a dramatic transformation and that they aren’t “too steeped” in the past establishment of a company.

Insider CEOs previously maintained a performance premium over outsider CEOs (usually appointed during forced turnovers), but PWC says that premium has diminished as more outsider CEOs have come from planned successions.

PWC did find that the longer an incumbent CEO has stayed in his or her role, the more likely an insider candidate will be promoted to CEO. “The longer you’ve sat as a CEO, the longer time you’ll have to develop potential CEO candidates” says Karlsson.