A recent Raconteur article featuring research by executive search firm Spencer Stuart highlighted a rise in the selection of internal candidates over external hires to replace outgoing CEOs. The article cites that over 77% of CEOs appointed at global publicly listed companies were sourced from within and that it has been steadily increasing over the last five years (a regular interactive report by Russell Reynolds also provides a longer-term view of the movement of CEOs). The article suggests several reasons for this increase, including the reduced risk of a known candidate, with in-house company knowledge and experience accelerating the speed to proficiency, and the speed of the appointment process when selecting internally, rather than externally – particularly considering lengthy notice periods and non-complete clauses. They also reference salary, suggesting that internal candidates can be cheaper than external hires.

Whilst these are all valid reasons for the shift in the trend, it got us curious at LACE about some other potential factors and where those candidates are coming from. How effectively are they being prepared for the top job? Could that person come from a HR background? What are the challenges you should be thinking of?

Strength in stability

There is no doubt that over the last 10 years, organisations have seen monumental amounts of change – from evolutionary change as technology helps us to go faster and wider, to unanticipated change, as the pandemic introduced overnight challenges that many were unprepared for. Alongside those in the last decade, we now see challenges in relation to our geopolitical situation. Rapidly evolving technology changes through AI, as well as cultural and social changes that reflect a different psychological contract in the workplace. With so much change, it just might be reassuring to have some stability in the leadership of the business you work in.

Whilst there can be strong arguments to bring in fresh thinking, diverse experience, and innovative approaches, there are many advantages too to the internal hire. These might include:

• Continuity – the strategy set can be followed through, not reimagined by a new CEO seeking to make their mark, the challenges are already understood and the opportunities are already visible
• Alignment – an internal candidate is likely to be aligned to your organisation’s culture and values, and be able to quickly adapt to their new role within a familiar environment
• Preparation – internal talent can be more prepared, engaging early with the outgoing CEO and C-Suite colleagues
• Confidence – having established themselves successfully, and performed well within a senior role, it is likely that the internal hire will bring credibility to the role and the confidence of the board, shareholders, the C-Suite and among colleagues across the business.

If any of these are in doubt, then so should the appointment be. Is your selection process sufficiently robust?

As Chief People Officer (CPO), are you willing and able to challenge and be heard?

Successful succession strategies

We reflected on what these trends might mean for the talent specialists and their strategies. One of the key governance roles of any board is to determine the succession plan in case of the unexpected loss of any key individual in critical roles. But for effective succession planning to be in place, the process has to start much further down the line, and will typically be led through the talent function, with the CPO taking responsibility on behalf of the CEO.

The rise of internal hires into CEO roles suggests the efficacy of the process – but only if several potential successors are available, if candidates are ready and fully prepared and if the succession pipeline offers a healthy, diverse and respected set of candidates for the short and long term.

Talent development strategies must be in place to support the growth of identified individuals towards the CEO role, incorporating functional and business capabilities alongside a people orientation, living organisation values and constantly learning.

Is your pipeline sufficiently healthy? And is it healthy with the right talent? Are your talent development strategies delivering the right outcomes – and leaders who are ready, able and respected enough to step seamlessly into a new senior or executive role?

CPO to CEO – why not?

It’s perfectly reasonable to think that as a C-Suite, and potentially board-level, business leader, you could be in the running for the CEO vacancy given your experience and your people focussed leadership. Yet, according to Spencer Stuart’s research the CPO doesn’t feature in the ‘last mile’ roles from which the CEO is likely to be plucked – these are typically COO, divisional CEO, CFOs and leaders promoted from below the C-Suite.

Executive search firm NGS global cited four ‘must-haves’ that must be in the CPO’s portfolio in order to get there:

• Accountability for P&L, demonstrating a knowledge of how to run the business, and amplifying commercial acumen and capability
• Broad executive experience, with demonstrable success in leadership roles beyond the people function, particularly in sales, operations or finance
• Long term vision and strategic thinking, with deep knowledge of the business context, competitive market and a vision for the future of the business, with the future of work in mind
• A great network, one that includes a senior executive team that would advocate you, supportive leadership across the business and respect and trust from the employee population.

Back in 2023, we gave our LACE perspective on an article from Worklife which suggested that CHROs were increasingly in line for the top job, reporting that “Chanel, venture capital firm Anthemis Group, food chain Greggs, and supermarket group Tesco Ireland all promoted C-suite leaders in human resource roles to CEO.” We argued that the pandemic had put HR into the spotlight, take a strong leadership role and given the CPO the chance to shine.

However, in some of our own ongoing research, we are finding that CPO skills gaps continue to focus on commerciality and business acumen. The function must see that as a critical enabler for itself, as well as for the lofty ambitions of its senior leaders. So as a CPO, how is that informing your decision making? How are you flexing that muscle in your functional role? And how can you continue to elevate and amplify those skills?

You probably have a lot of questions…

If you are a CPO you’ll be wondering what all this means for you – professionally and personally.

1. What does our business context – including our current strategy, our values and our ambition – require from our future CEO? What challenges will they face, and what opportunities must they optimise?
2. Is the reporting C-Suite team the right mix of talent to support the new CEO?
3. Have we got a clear succession plan leading to the CEO? Is your succession pipeline robust and does it bring the right balance experience and diversity of thinking to the role?
4. Are the success criteria and the experience requirements for the CEO role clearly mapped out in our organisation? Are development plans that support the acquisition and utilisation of the right skills, knowledge and experiences within the succession pipeline?
5. How do you assess the benefits of internal succession against those of external appointment? What is the state of the external CEO market?
6. How can we encourage and enable a broader talent pool for C-Suite positions?
7. Do we have the right sourcing and selection strategies, internally and externally, to accurately assess and identify the very best candidate?
8. As a CPO, how can I prepare myself for a CEO role? What experiences do I need to build, and what competencies should I be demonstrating?

If there are any questions here that you are still thinking that you need to answer, then please feel free to reach out to us for a free consultation on how you can tackle them. Fill in the form below and let us know your challenges.