The Rise of the Outsider CEO

Annually, Strategy& assesses what companies look for in their CEOs by analyzing the decisions companies make when it's time to choose a new leader. In this year’s report, we take a special look at outsider CEOs and the circumstances in which they are being hired. In addition, we have our annual analysis on CEO turnover, the 2015 incoming class of CEOs, and women CEOs.

Outsider CEOs

Hiring an executive from outside a company to serve as chief executive officer used to be seen as a last resort — something that typically happened when a board of directors had to force out the incumbent CEO suddenly, or had failed to groom a suitable successor, or both. Over the last several years, however, more companies have deliberately chosen an outsider CEO, more often than not as part of a planned succession. In this year’s report, we look at the data on outsider CEOs and the circumstances in which outsiders are being hired.

Companies are now making a deliberate choice in their succession planning to bring in outsider CEOs. In the latest four-year period (2012–15 boards chose outsiders in 22 percent of planned turnovers, up from 14 percent in 2004–2007. That represents a 50 percent increase in the rate of outsider selection. Industries experiencing the most disruption have brought in higher-than-average shares of outsider CEOs. These industries include telecommunications (38% incoming outsider CEOs from 2012 to 2015), utilities (32%), healthcare (29%), and energy (28%).

Outsider CEOs were more likely to be hired if the:

• Company was low performing

• Chairman did not have CEO experience in the same company

• Former CEO was also an outsider

Outsider CEOs were less likely to be hired if the:

• Chairman was hiring their first CEO at the company

• Former CEO had a long tenure

• Company was large Outsider CEOs have closed the performance gap with insiders.

For the third straight year, outsider CEOs have delivered higher median total shareholder returns than insiders. Western European companies in general are hiring outsiders more reactively than proactively. Western European companies hire almost double the share of outsider CEOs compared with companies in the U.S./Canada. Additionally, outsider CEOs in Western Europe are significantly more likely to be appointed to low-performing companies and more likely to be forced out.

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