The right pick

When is an outsider CEO a good choice?

The year's biggest suspense drama came a close last week when Microsoft unveiled insider Satya Nadella as its new chief executive. He was chosen over two other candidates who were in the lead positions to take over as CEO - Ford CEO Alan Mulally and Pichai Sundarajan, who had worked in McKinsey & Co before joining Google in 2004. Most agreed Nadella's background in creating Microsoft's Internet-based - or 'cloud' - computing services makes him a safe pair of hands to take the company forward.

Compare the event with India Inc's big story last year: PepsiCo roping in former Nokia head for emerging markets, including India, D Shivakumar, as its chairman and CEO, India region. As the strategy head of a consulting firm puts it, the global beverages and snacks major was looking to "infuse a fresh perspective in the way the teams operate and deliver to the end consumer". It is another matter that corporations like Britannia, ICICI Bank and the Tata Group have traditionally groomed internal candidates to take on leadership positions over a period of time and do all of that - infuse freshness, push for growth etc.

While Microsoft's or PepsiCo's decision is unlikely to be the last word on the succession debate, the events bring to the fore one of the hotly debated topics in corporate management: should a CEO be chosen from within a corporation or hired from outside?

Why is this debate so important? First, because identifying and grooming a great successor is one of the most important accomplishments of an incumbent CEO. Second, planning a succession continues to be a subject of concern that at some point will come to occupy the attention of decision makers. Indeed, the heated pay-for-performance debate of the last few years has induced boards of directors to increase the rigour of the CEO selection process.

So should you develop an internal or an external successor? More importantly, what's best for your organisation, and for you?

Ask the right questions
Expert opinion is divided on the subject: Intuitively, internally promoted executives know the business, fit the culture and understand the organisation's strategy and vision. Then, externally hired executives don't always get "intellectual buy-in" from employees required to be effective over time. But experts also say that when a fundamental strategic shift is needed, outsiders can - and should - be hired because they represent change, are not tied to any culture or strategic 'past', can question assumptions that have long been taken as given and can bring in new skills while acting as a catalyst for ambitious growth. But given that hiring CEOs from outside is a more expensive proposition (research shows it can cost roughly 50 per cent more than when you hire an insider for the top job), even riskier at times.

That said, published research suggests companies increasingly look outside to hire their CEOs. The CEO Succession Practices (2013 edition) report released by The Conference Board shows in 2012, 27.1 per cent of S&P 500 companies that faced a CEO succession hired an outsider for the top job. While the rate confirms a trend recorded since the 1970s, it is much higher than the 19 per cent reported in 2011. The growing percentage of outsiders chosen as new CEOs may show that directors don't always like what they find within the companies' ranks. However, a number of companies that underwent a succession event in 2012 selected a director from their own board as the new CEOs. The director-turned-CEO succession model provides companies with a chief executive who is familiar with corporate strategy and key stakeholders, thereby reducing leadership transition risk.

Avoid that costly mistake: Nishchae Suri

  What are the possible pitfalls?

• Selecting the right external leader for the role requires sound judgement especially given that the organisation has a limited time period to observe and assess the candidate. Organisations rely heavily on “resume value” (how successful the individual has been in his/her previous roles and the contribution he/she made to the organisation) as well as the feedback they receive through reference checks.
• While many organisations are quick to identify the right technical or functional competence needed for the role, they overlook the importance of getting the right fit in terms of culture. This creates an environment where the individual’s preferred style of working, values etc are often in conflict with that of the organisation.
• A leader parachuted from outside is resented by those who believe that they lost out on the leadership position primarily on account of this person. Such resentment could manifest itself in many ways including the lack of support and collaboration, much needed for the success of this leader.
• If the very reason for which the individual is hired is not clear, either to the individual or to the organisation, or even both, the end outcome of such an association is sub-optimal. Neither the leader nor the organisation stand to benefit in such a situation.

How can I avoid them?

• Drive transparency and build trust. Companies need to develop robust internal employee development processes and have a transparent system of promotion. This at one level results in reduction of the need for external hires and at another level, reduces a ‘sense of loss’ for those who do not get promoted on account of the external leader coming in.
• Be clear what you need to hire for — the core competencies and behavioural attributes that are needed for the role
• Assess whether the right person is available internally before looking for an external candidate.
• Build the case of hiring an external candidate with all stakeholders such that there is complete buy in before the person is brought on board.
• Ensure the right people are involved in the hiring process.

Nishchae Suri
Partner & Head, People and Change, KPMG India

Whatever the case be, let's look at why companies seek leaders from outside in the first place. Sheen Sunny Akkara, executive director, human resources, Nielsen, India Region, suggests a possible reason: "It all begins with the decision of the organisation on whether - and how - it wants to transform." In his view, when companies look to expand into new services, to increase sales/market or identify leadership gaps they tend to look outside for direction.

"When you prepare for a big jump that is the time when you need disruption, something that the outsider can get done," adds Harit Nagpal, CEO, Tata Sky, who joined the direct-to-home provider from mobile service operator Vodafone.

Nagpal, who has worked in companies like Lakme, Marico, Pepsi, and Shoppers Stop, introduced interesting changes after he joined Tata Sky. He branded packages based on genres such as movies, sports, kids, music etc instead of the earlier 'gold', 'silver' and 'platinum.'

The earlier branding of packages never really explained to the consumers what was included in the package they bought.

Mittu Chandilya, the youngest CEO in aviation globally, agrees that when a CEO is hired externally he can bring with him valuable insights. As chief executive of Air Asia India, Chandilya entered the aviation industry in the midst of turmoil. It didn't matter to Air Asia that Chandilya didn't have prior experience in the aviation industry per se. (His LinkedIn profile lists head of Services Practices for APAC at Egon Zehnder International, General Management at Ingersoll-Rand Company, founder and director at S.O.S under his past experience.) The company insiders feel that the young CEO, with his previous successes in start-ups and with his ability to take risks, will be a great asset for the new brand.

For the company this meant a freshness of perspective that would allow Chandilya to frame a well-rounded commercial strategy from ground up. "Aircraft is a heavy asset because the moment it touches the ground, it begins having an impact on the balance sheet of the company," says Chandilya. "I think if the company had hired an insider, mimicking another airline company's strategies would have been the natural outcome." He says his experience has given him a risk appetite, which he has infused in the Air Asia culture. "Given the kind of independence the promoters have given me, I have been able to translate my perspective into a reality. We have increased the size of the fleet than originally envisaged, the sector's cash-strapped status notwithstanding," he adds.

But for externally-hired leaders to make an impact, companies and their boards should identify the hurdles in the way and remove them. One bad decision at the leadership level, especially when the hiring is done externally, can spoil the show for the entire company as people become wary which in turn erodes team spirit. According to Nishchae Suri, partner and head, people and change, KPMG India, hiring disasters happen when companies rely solely on the external leader's 'resume value', there may be a collision in culture fit wherein the leader's personal style of functioning collides with the ethos of the company's.

The board can jinx the process by not keeping the existing team in the loop, when there is zero transparency with regard to the board's plans to hire an external leader. The final straw would be not giving clear direction or enough time to the leader to adapt.

Look at the big picture
But those who have successfully managed to steer the ship as a captain hired from outside, swear that it is actually the overall boardroom strategy that determines whether the company will wade through choppy corporate waters or sink. Amit Shukla, head, Strat Team Advisors, feels that external hiring can be a healthy move for both the individual and the company if done correctly. He even recommends companies try out cross-industry experience to allow for copying of skills (reworking solutions and customising them from one industry to the other), to revamp a business model, spot opportunities, and be more value-seeking.

This blueprint, however, requires some time to succeed, so that the new CEO can complete what Vivek Gambhir, MD, Godrej Consumer Products, calls a "bridge-building exercise". Largely, Gambhir is in favour of hiring leaders organically. In his view, outside CEOs are under tremendous pressure to prove and perform in record time. That confusion is what leads to "the big mistake", of listening less and talking more in the first six months whereas it should be the reverse. Gambhir joined Godrej as the strategy chief in 2009 when the company was looking at its next phase of growth not so much through an entrepreneurial, instinct-led approach (which was the case then) but with a more structured focus on its various verticals. Gambhir, an outsider then, not only found time to absorb the company's core values, he could also made an effort to bond with employees, to be accepted as part of the team. In 2012 Gambhir was named successor to managing director A Mahendran, who was due to retire in 2013. A well-thought-out career dialogue with the chairman and a solid time frame at hand, says Gambhir, allowed him to transition into the leadership position.

Others like Vikram Raizada, executive director & CEO, retail, Tara Jewels, believe that hiring externally works better because it allows changes to take place in a sector that wouldn't otherwise move beyond the tried and tested. Raizada, who joined the jewellery manufacturer from IMG Fashion (he was also head of marketing at Murjani Group and vice-president of marketing at MTV Networks), focused the company's attention on an younger audience bringing more contemporary designs and even changing the grammar of how jewellery is sold. Instead of having salespersons take out jewellery trays and show one piece at a time to the potential customer as is the norm, the company hung its jewellery pieces on the store walls. "It's simple," he says, "you can reduce your inventory sharply by putting jewellery on display rather than hiding them inside cupboards and showing them one by one. Because in retail, particularly jewellery, inventory is expensive. The focus should be on increasing sampling and sometimes only an outsider can do this objectively."

At the end of the day, however, the company needs to look at what stage of evolution it is at and what it seeks to achieve in the future. The bottom-line is simple. Whether hiring leaders externally or internally, the exercise works only if the company and the individual are willing to give each other time-time to build faith and trust and then go for growth not just in terms of meeting targets but also building an internal leadership pipeline (it is non-negotiable, as experts will tell you). Once the vision is shared, the CEO can inject his or her learnings and insights and replicate the success stories for your company too.

That really is the secret sauce.