Factor 30 is Hotting Up

Foreword     Chapter 1: Looking Beyond the CEO      Chapter 2: Equality At The Top

Given recent trading conditions, it is perhaps unsurprising that internal CEO appointments hit an all-time high in 2023.

Globally, of the 178 CEOs appointed in 2023, 77% were internal hires.

Within the CAC 40 and the Nikkei 225, every single CEO appointment in 2023 was internal. The ASX 200, S&P 500, Euronext 100 and NIFTY 50 were closer to the average (with 79%, 76%, 75% and 67% respectively) and although the figures were notably lower for the STI and DAX 40 (both 50%), the prevailing internal trend is growing increasingly stronger by the year.

There are several factors driving the trend: shareholder pressure on the basis that an internal candidate is generally lower risk and lower cost; media pressure on the basis that an external appointment may create short-term shareholder value but quickly dissolve; and cultural pressure on the basis that an internal promotion to CEO is more likely to inspire and encourage current staff to embrace their own connected learning opportunity.

Boards are looking for consistency in candidates, as well as demonstrated ability to deliver within the organization. It’s one reason why internal appointments are increasing.” Luke Meynell, Global Lead, RRA’s Board & CEO Advisory Partners

Additionally boards want to send a message that they have been doing their job by constantly and effectively planning for successions. This means unplanned emergencies as well as systemic future planning have been effectively prepared for.

RRA’s Steve Langton sees boards apply the ‘Factor 30’ theory when selecting their CEO candidates. “For a board to appoint an external candidate, we are told they have to be at least 30% better than an internal candidate. On the face of it, the weakness of the internal candidate is that they haven’t yet been a CEO. The external candidate is likely to have been a CEO and be more mature with more personal wealth and more choice. But as a result of this, they may not want to do five years in the role and boards also perceive the risk that they could be seeking the short-term glamour of waving a magic wand.”

Our data supports this, revealing that internally appointed CEOs serve, on average, 1.4 years longer than those who were externally appointed. When we examined the reason for leaving, we also found that external hires are more likely to be fired (30%) than internal hires (24%).

RRA’s Rusty O’Kelley is seeing the internal trend playing out across the US: “I’m not surprised internal hires last longer, as they know the culture better and tend to be promoted when the company is doing well. Whereas externals are typically brought in if there’s a succession failure or the company isn’t doing well and needs a change of direction.”

Based on all of the above, Steve Langton concludes that: “More and more boards are confidently making internal CEO appointments and being praised for it because it works.”

Laura Sanderson echoes this view: “The trend towards the appointment of internals is basically a good thing, given the elevated risks associated with bringing in an external candidate, together with the usual time lag between an external candidate being announced and them being in a position to be effective in the CEO role, which can be up to two years.”

Internal and first-time go hand in hand

In 2023, 86% of appointed CEOs were first-timers, which is broadly in line with the five-year average (88%).

Steve Langton points to a clear link between the rise of internal appointments and the healthy rate of first-time CEO appointments: “Clearly, we are seeing a trend in the increase of internal CEO appointments, but this is also the reason we’re seeing such an increase in first time CEO appointments—because they’re internal appointments, they’ve almost certainly not been a CEO before. I can definitely envisage a short-term scenario where almost all of the world’s CEOs have been promoted from within.”

But he also warns that CEO search should not become ‘an emergency service’: “Whilst the shareholder, media and cultural pressures outlined earlier are all likely to continue, we need to be careful that we don’t allow CEO search to be an emergency service. There is far too much at stake for that to happen.”

“Whilst the shareholder, media and cultural pressures outlined earlier are all likely to continue, we need to be careful that we don’t allow CEO search to be an emergency service. There is far too much at stake for that to happen.”

Steve Langton also reflects that, whether an internal or external hire, the number one attribute for a CEO is the ability to learn: “When we consider the qualities required for a CEO, there’s a long list: strategic thinking, emotional intelligence, communication skills, gravitas, leadership. But by far the most important thing that determines CEO success is their learning ability. Are they willing and able to constantly learn?"

“Arguably, an advantage with internal CEOs is that they tend to be restlessly paranoid that what worked yesterday won’t work tomorrow, which means that learning is right at the top of their ‘to-do’ list.”

Methodology

CEO turnover data from before 2023 is based on the constituents of each index as of March 2023, so doesn’t account for companies that moved on and off the indices before then.

Classification of reasons for CEO departures is derived from a comprehensive review of publicly available information, including news publications, official announcements, and relevant articles around the time of each CEO's departure announcement. This categorization is intended to provide insight into overarching trends and should be interpreted within the context of the best available information at the time of the analysis.

Authors

• Stephen Langton leads Russell Reynolds Associates’ Board & CEO Advisory Partners in Asia Pacific. He is based in Sydney.
• Marie-Osmonde Le Roy de Lanauze-Molines is a senior member of Russell Reynolds Associates’ Culture capability. She is based in Paris.
• Luke Meynell co-leads Russell Reynolds Associates’ Board and CEO Advisory Partners. He is based in London.
• Rusty O’Kelley co-leads Russell Reynolds Associates’ Board and CEO Advisory Partners in the Americas. He is based in Miami.
• Laura Sanderson leads Russell Reynolds Associates’ operations in the UK and oversees the firm’s Board & CEO Advisory Partners team throughout Europe. She is based in London.