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Corner Office
 
CEO CHOICE: OUTSIDERS VS INSIDERS
Do Outsider CEOs really Add Value?
Contemporary Evidence suggests that Outsiders may be likely to Excel and Outperform Insiders at Companies that are in crisis. But Historical and Empirical Research Suggests otherwise. Where does reality stand?
Issue Date - 26/05/2011
 
It was the spring of 1985, and the board of Apple Computer decided it no longer needed the services of one Steven P. Jobs. The main dramatis persona in the tech world’s biggest unfolding drama of a quarter-century ago was John Sculley, the Pepsi executive whom Apple’s board had brought in as CEO to oversee Jobs and grow the company — similar to Eric Schmidt’s role with Google founders Larry Page and Sergey Brin — in 1983.

Was Apple’s board right in bringing outsider Sculley to revive the waning fortunes of the company? The truth is that, depending on the company and its situation, it can be just as important to bring in outsiders as it is to develop homegrown talent. Around the time Sculley came on board, Apple was struggling with low Macintosh sales and there was a need to bring some order to the creative chaos Jobs had unleashed. Sculley got Jobs out of his hair two years after taking over Apple. In the course of undertaking his major reorganisation, Sculley fired 1,200 employees (20% of the total workforce) and put the broken parts of the company together to form one unified Apple and delivered its biggest growth, percentage wise, in its history prior to the return of Steve Jobs in 1997.

Like Apple, there are many global companies that are famous for promoting talent and grooming leaders from within but have all brought in outsiders when they needed to. According to analysts, the health, stability and competitive position of the company at the time of transition are the critical factors in determining whether an insider or an outsider is the best choice. Experts contend that insiders perform more consistently when their companies are in a healthy state at the time of appointment, whereas outsiders perform better when the company is in some form of crisis.

Ford CEO Alan Mulally, a longtime former Boeing executive, transformed an iconic American company that was on the brink of bankruptcy. Under Mulally, decision-making became more transparent, once-fractious divisions began working together, and cars of better quality started rolling faster from design studio to showroom. Mulally may be getting the rewards and accolades now, but who remembers what Ford was like in ’06, ‘07 and ‘08 when bold and difficult decisions were being made and people wondered if the aerospace executive could cut it in the automotive world. “Many doubted Mulally’s ability when he first came to Ford. There are doubters no more. He has proved to be an outstanding leader, and helped the company reach new heights,” said Michelle Krebs, an automotive expert and Senior Analyst for auto experts Edmunds.com. To get a sense of Mulally’s contribution to Ford’s turnaround, take a look at the increase in the value of the company from 2008 to 2011 as measured by its market capitalisation. During the period there has been over 1000% increase or an increase of $51.26 billion. A 1% share of that would be $512 million. The share price of the company has soared from a low of $1.26 on November 19, 2008, to $18.97 on January 13, 2011 and is currently trading around the $15 mark.

 
Another car maker, which has banked on an outsider CEO to reverse its sagging fortunes is General Motors. In September 2010, private equity expert Dan Akerson was brought in as CEO within a couple of months of the exit of Fritz Henderson, a GM careerist of 25 years’ standing, who in turn gave way to Edward Whitacre in December 2009. As someone from outside the automotive industry, Akerson is expected to breathe new life and give strategic direction to the ailing automaker. Since he took over, GM reported a profit of $4.7 billion on $135.6 billion in revenue for 2010, the company’s first profitable year since 2004 and largest since 1999. Its retail sales of passenger cars were up 76% in February over those of a year earlier.

Studies have proved that successful outsider CEOs are able to provide effective leadership, even if for only a limited period of time, as in the case of Sculley. Or Jeffery Kindler who was appointed CEO of Pfizer back in 2006. His experience at the law firm Willams & Colloney and companies like GE and McDonald’s surely came in handy for the drugmaker in protecting and advancing its intellectual property and in responding to various legislative initiatives on patent review, patent challenges and patent infringement. However, when Kindler made his exit in December 2010, Pfizer’s share price had stalled around $16, down from $26 in July 2006.

At the same time, Wharton’s Dr. Katherine Klein writes, “The ideal scenario is careful succession planning that grooms people internally.” A 2007 Hay Group Study shows that around 80% of Fortune’s Most Admired Companies chose internal candidates as CEOs! Even Booz Allen’s 2008 CEO research documents that 80-83% of CEO recruits are insiders! The Booz Allen research further puts forth that operationally and statistically, ‘insider CEOs’ outperform ‘outsider CEOs’! Jack Welch had five internal prospects ready to replace him at any moment. The iconic Goizueta of Coca Cola had four. How many have you?

Pawan Chabra           

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