Robert Iger, a nine-year Disney veteran, was chosen to replace embattled Disney CEO Michael Eisner despite running against a star-studded cast of outside CEOs including eBay's Meg Whitman,Yahoo's Terry Semel, and the Gap's Paul Pressler. The appointment of an inside candidate demonstrated the board's confidence in Disney's internal talent capability.
Despite a few notable examples of companies that invest in building internal bench strength, many companies don't deal with succession management seriously because they are confident about sourcing external talent when they face a talent crisis. "Twenty years ago," says Jeff Sonnenfeld, associate dean at the Yale School of Organization and Management,"only 7 percent of the firms hired CEOs from the outside. Now it's 50 percent." Although external leadership appointments are gaining ground, experts emphasize the profound benefits of succession from within. Sourcing external candidates is not only expensive, it probably reduces the chances of success for the new leader.
Globally, over the past seven years, home-grown CEOs delivered 1.9 percentage points per year higher shareholder returns than externally appointed CEOs did, according to Booz-Allen Hamilton's annual study of CEO succession at the world's 2,500 largest companies. Further, a company's decision to recruit from outside can have a deleterious effect on its retention strategy. By hiring externally the company sends a dangerous message to its employees that they are seen as incompetent. Internal talent may feel stagnant and uninspired, and may jump ship when their hope of earning a top seat is shattered.
A study carried out by Stanford University researchers James C. Collins and Jerry I. Porras, culminating in their best-