Navigating CEO succession: Buying versus building from within

Written by Vijay Karkare, Managing Director of Cornerstone International Group – as part of Board Benchmarking’s latest report ‘Benchmarking board performance: 500 board reviews later‘.

In the dynamic landscape of corporate governance, the meticulous process of CEO succession planning has emerged as a strategic imperative. At the heart of this intricate process lies a fundamental question that boards must grapple with whether to “buy” external talent or “build” from within.

The significance of succession planning lies in its capacity to ensure organisational continuity, resilience, and sustainable growth. It is a strategic process that identifies and develops potential leaders, ensuring a smooth transition of key roles when incumbents retire, resign, or move on.

CEO succession planning stands as a pivotal duty of the board, bearing significant implications for an organsation’s future. The average CEO tenure in India spans just under seven years, and with a significant number of failures in first few years, the board shoulders the responsibility of choosing a leader who can not only navigate the present business landscape but also steer the company through evolving market dynamics and shifting competitive positions in the years to come.

The significance of succession planning lies in its capacity to ensure organisational continuity, resilience, and sustainable growth.

The question of buying versus building leadership transcends borders, with varying practices across the globe. While Apple, Microsoft and host of other companies could identify a successor from within the trend of external hires, or “outsider CEOs,” has gained momentum in recent years. Companies like IBM and Ford have turned to external CEOs to infuse new perspectives and navigate complex industry shifts. This approach aims to inject a breath of fresh air into organisations, in the face of rapid changes.

The age-old debate between ‘buying’ external talent or ‘building’ from within has persisted, each approach carrying its own set of advantages and challenges. This has been exemplified by the top four Indian IT giants each employing distinct strategies that have yielded varying outcomes. While TCS & HCL demonstrated successful transitions through Internal development, Infosys & Wipro struggled with the Buy-In challenge.

The choice between external hiring and grooming is not a one size fits all decision.

The choice between external hiring and internal grooming is not a one-size-fits-all decision. Instead, organisations must carefully evaluate their own circumstances, strategic objectives, and corporate culture. While external CEOs can inject new perspectives and innovation, internal leaders bring a deep understanding of the company’s ethos and operations. Successful organisations often find a balanced approach that incorporates both methods. They cultivate internal talent while remaining open to external candidates when their skill sets align with the company’s needs.

Only 34% agree or strongly agree ‘the board ensures that there are appropriate succession plans in place for Management (i.e., the CEO and key Management positions)’

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