Many organisations actively promote a culture of appointing senior roles from within. Although smaller companies may lack the capacity to deliver on this for the role of CEO, larger companies are more likely to have the range of talent from which to draw their next appointment.
While internal promotion and opportunity is a valuable recruitment and retention tool, according to Gerard Daniels Director and Co-Founder, Michael McAnearney, it can be a complex journey for Boards to navigate. “If you set the expectation that the CEO and other senior leadership opportunities may be appointed from within, it is valuable to follow behaviours and initiatives that will improve the likelihood of realising such an outcome. There is no doubt though, that balancing internal and external appointments for strategically significant roles can be complicated,” he says.
Here we invite Michael to share some considerations in the appointment of leaders from within your organisation and the inclusion of external candidates.
Building internal talent pipelines for CEO succession
To make a successful appointment of your next CEO from within your organisation, suitably capable people must first exist within your company. Over the past three decades Michael has closely observed the unwavering commitment of one Australian company to appoint CEOs exclusively from within – an approach he acknowledges is rare.
“It takes a deep and genuine commitment to develop leadership talent from within as far as the CEO appointment is concerned,” says Michael. “Developing a diverse pipeline of senior leaders across a business where potential leaders can emerge as future contenders for the top job requires careful and long-term planning and retention.”
The need for due diligence
Despite investing in succession planning and talent development to build strong internal CEO candidates, the Boards of public companies will often conduct a market search to complement internal executive assessments.
“Regardless of the investment that goes into building CEO bench strength, extending the search outside of an organisation can be an important part of due diligence to satisfy shareholders and ensure that an informed decision can be made,” says Michael. “As such, there are very few organisations that wouldn't also look to the market when appointing their next CEO.”
Talent retention
When internal candidates are unsuccessful in an application for the CEO role it can affect the retention of high-calibre talent.
“Senior leaders are typically at the prime of their career, so they can’t afford to wait around for a role like CEO that doesn’t present often. It is therefore not uncommon to see an exodus of senior leaders from large, listed companies following a CEO appointment,” says Michael. “When internal candidates are unsuccessful in their application for CEO, they are more likely to consider opportunities outside the organisation, and invariably quickly emerge in other similar sized organisations in this role. While this can generate refreshment of the team it also can deplete the talent pipeline for future appointments.”
Communication is a factor that can affect the retention of senior leaders. “There can be a lot riding on the decision to put your name forward for the CEO appointment and at times we see internal candidates treated poorly,” says Michael. “To improve retention, organisations must align what they present and publish about their culture with how they relate to their internal leaders through a search program.”
In making CEO appointments many Boards are aware of these risks, although Michael argues that some turnover isn’t always entirely a bad thing. “Sometimes the regeneration of leadership talent can be good for an organisation,” he continues. “Either way, having an open, transparent and forward-focused approach to CEO succession is important in creating growth opportunities for key leaders and maintaining internal talent pipelines.”
Levelling the playing field
There can be a tendency for some organisations to favour internal CEO appointments, but from June 2021 to June 2022 the number of external CEO appointments in ASX 300 listed companies almost doubled the number of internal appointments.
“A range of factors can impact the selection process for internal candidates,” Michael explains. “This can happen when there is pressure from shareholders or other stakeholders to recruit externally; when significant cultural or strategic change is required; or when a CEO’s departure is unexpected and succession plans are not in place.”
Bias can also stem from the Board’s limited exposure to the achievements and leadership style of external candidates, compared to what is often a more candid and detailed view of internal talent. “It is common for Boards to place undue weight on the areas where an internal candidate is still perceived to be in development mode,” says Michael. “To achieve a successful selection process, Boards must acknowledge the existence of conscious and unconscious bias, and actively work to remove it.”
Regardless of any preference for internal or external candidates, understanding where you want the company to head and its strategy, together with what is needed from your next CEO in achieving that, is key to ensuring the appointment of the best possible person to lead your organisation.
For advice on succession planning or assistance with internal and external executive search, connect with Michael McAnearney or contact your local Gerard Daniels team.
