The development of a great successor is one of the most important accomplishments a CEO can achieve. But should you develop an internal or an external successor? There are many reasons, both personal and professional, to make the investment in developing your successor from candidates inside the company.

To begin with, if you hire a CEO from outside the company, the board will expect a “name brand” leader who has a proven track record of success. There aren’t that many out there! To hire such an executive, you are going to have to pay a tone of money and provide an expensive golden parachute if things don’t work out. Several recent disaster stories (including Home Depot and Hewlett Packard) have shown exactly how much this type of failure can cost the company. The main damage to the company, however, is not the actual amount of money spent; it is the damage to the corporate reputation. CEOs from the outside who fail—and then get tens or even hundreds of millions of dollars from the company for getting fired—provide incredibly negative stories for the business press that can lead to long-term PR damage for the corporation.

While the damage done by a failed external CEO is bad outside the company, it is even worse inside the company. When chief executives fail, employees are often dismissed and resources are cut. It is very hard to explain to twenty-year veteran employees why they have to take less so a failed externally hired CEO can get more.

In short, hiring a name brand CEO from outside the company who fails is usually a disaster. The board of directors looks like a group of idiots who have only succeeded in embarrassing the company and wasting money. This sad drama only reinforces the increasingly common perception that CEOs are overpaid and board members are ultimately looking out for their own interests, not the interests of the company.

Since you are the soon-to-be former CEO who is part of the selection process, your own reputation is going to go down with that of the company. This is certainly not the legacy you want to leave.

There is no research that shows external CEOs to be superior to internal CEOs in producing long-term returns to the corporation. While they may bring the advantage of an external perspective, they come with the disadvantage of not knowing the internal workings of the company and, in some cases, not even knowing the industry.

One former CEO, after our discussion on this topic, pointed out that while a CEO may support the internal successor, the board may be enamored with the “glamour” of a proven internal candidate. He noted that one challenge of the departing CEO is to manage the egos of board members who may find the internal candidate less personally exciting and who like to hang out with other famous leaders from the outside.

I am not suggesting that companies should always hire internal candidates. There are obviously case studies where external CEOs have made a huge positive difference, as is the case at IBM. I am suggesting that external CEOs come with extremely high risk and that you should develop an internal successor if at all possible.




Excerpted from Succession: Are You Ready? Memo to the CEO, Copyright 2009.

Marshall Goldsmith is a world authority in helping successful leaders achieve positive, measurable change in behavior: for themselves, their people and their teams. His book What Got You Here Won't Get You There,won the Harold Longman Award for best business book of 2007. Marshall invites you to visit his library (MarshallGoldsmithLibrary.com) for articles and resources you can use.