Boards Are Choosing Record Levels of Internal Candidates for CEO

Fully 85% of U.S.’ currently sitting CEOs came from internal appointments, up from 78%, compared with their predecessor class of 2012, concluded executive-recruitment firm Russell Reynolds Associates, after examining the background of more than 1,000 chiefs from 2015 data.

Spencer Stuart, also an executive-recruiter, echoed that conclusion in a just-reported study for the Wall Street Journal, which showed that about 80% of companies in the S&P 500 that chose a new CEO last year promoted an insider, the highest proportion of internal appointments since the firm began tracking CEO transitions at big businesses in 2004. It also represented a 20-percentage-point jump since 2012.

The shift reflects the fact that “boards are getting much better at CEO succession planning,” James Citrin, head of the North American CEO practice for Spencer Stuart, told the Journal.

Russell Reynolds noted, “The profile of recently appointed CEOs has not changed as dramatically as the environments that surround them,” citing, among other factors, the greater demands that boards have placed on their CEO selections in terms of diversity of background and experience, often including a functional leadership role and a prior position running a P&L business.

According to the Spencer Stuart research, “The ability to run sizable operations and inspire staff no longer suffices. Boards now want leaders with a range of experiences, including working abroad, cross-functional roles and public-company directorships,” the Journal reports.

Board members especially focused on the value of operating abroad, Spencer Stuart found. Nearly three-quarters of chief executives had worked internationally or oversaw a global function, and their average shareholder return was far higher than CEOs without this background.

Indeed, Russell Reynolds observed, “Given all the evidence of disruption and talk of innovation, one might have expected far more changes in the type of CEOs chosen. If anything, it appears boards are just finding new ways to land at a relatively safe and proven option.”

The vast majority of CEOs selected in the last few years, according to Russell Reynolds’ research, remain long-time company insiders. Even when the predecessor lasted less than three years, robbing the company time to plan an orderly succession, boards in the U.S. still chose an internal successor 73% of the time, the firm found. “And a growing share of recently appointed CEOs already have held a CEO role,” Russell Reynolds said.