Transitions / The Gerstner paradigm

Hired as an outsider, he saved a moribund company at the dawn of the PC era and started a trend

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If there were a poster boy for the advantages of reaching outside of a company to find a great leader, few could argue against former IBM chief executive Louis Gerstner.

Not only was Mr. Gerstner an outsider, the ex-RJR Nabisco CEO and McKinsey & Co. consultant also was from outside the industry, recruited in 1993 to resurrect the sleeping computer giant caught in a death spiral because of its staunch reliance on mainframes as the personal computer revolution was taking hold.

"He could break the rules and go in a new direction in ways that everyone agrees saved the company," said Don Hambrick, management professor at Penn State University's Smeal College of Business in State College.

In what many call a historic turnaround performance, Mr. Gerstner blew away prevailing skepticism and "unleashed the floodgates" for hiring outsiders, said Mr. Hambrick, who has been studying executive leadership for 30 years.

Although Mr. Gerstner makes a dramatic case for outsiders, the decision to tap an outsider or an insider for the top spot generally isn't clear-cut.

Virtually unheard of in the 1950s and '60s, choosing an external candidate has gained traction over the last 30 years and now accounts for about one-third of all CEO appointments, Mr. Hambrick said. That share includes newly hired top executives and those brought in as the heir apparent about a year before taking the reins.

The biggest factor driving the shift toward outsiders is the increasingly dynamic nature of the business world, including technological and geopolitical changes, experts say.

Insiders can have blinders on and be "too contaminated by the status quo" to be willing or able to make the changes needed to keep up, Mr. Hambrick said.

Another factor favoring outsiders has been the increased vigilance and influence of company board members, who are more assertive in trying to find the best candidates. Directors used to be "sleepy and beholden to the CEO" and often left it to the outgoing chief executive to anoint a successor, Mr. Hambrick said.

Despite the rising stock of outsiders, studies show they have a higher rate of failure than CEOs chosen from the inside. One reason is that outsiders tend to be recruited by troubled companies.

"On average, they are drawn into lousy situations ... where almost anyone would fail," Mr. Hambrick said.

But even controlling for those conditions, outsiders on average perform worse than insiders, he said.

One explanation is outsiders aren't as familiar with the strengths and weaknesses of the company and its people, and can get blindsided by internal politics.

Mr. Hambrick cites ex-Hewlett-Packard CEO Carly Fiorina -- hired for the top spot in 1999 and forced to resign six years later -- as "one of the most vivid examples of a disaster" among outsiders.

"She did not have appreciation for the company's culture," alienating too many people, he said.

"Often [outsiders] think they can bring about more change than organizations can accept. So they tend to bomb out," Mr. Hambrick said.

In contrast, leaders chosen from the inside "know who they can trust ... who is good at what tasks," said Linda Argote, professor of organizational behavior at Carnegie Mellon University's Tepper School of Business.

That familiarity helps them match the right person to the job and hit the ground running, she said.

"Outsiders can stumble on implementing change because they don't have the social relations and personal connections to know who to call on," she said.

Although hiring outsiders has become more common, roughly two-thirds of CEO appointments continue to be insiders.

Tapping an outsider generally is seen as riskier and more disruptive. Companies "must make sure they are willing to incur that risk and that the risk is worth it," Mr. Hambrick said.

Still, there are certain situations that absolutely call for new leadership from the outside, experts say, such as in the case of scandal or fraud inside the organization. That's when key customers, suppliers, employees and shareholders expect a house cleaning at the top.

"After Richard Nixon, the country needed Jimmy Carter, who was pure," said John Challenger, CEO of the Chicago-based executive outplacement firm Challenger, Gray & Christmas.

An outsider also is important when a company is in financial trouble.

"You need to look at that business with fresh eyes," Mr. Challenger said. "Promoting the protege or next in line can be more of the same."

Most big companies these days entrust the board of directors to oversee the search for a CEO's successor and hire an executive search firm even if there are viable internal candidates, Mr. Hambrick said.

"That's the sensible thing to do," he said. "The archaic thing is to turn over the process to the incumbent, who often has a fair-haired" favorite in mind who may be wrong for the job.

CMU's Ms. Argote said an organization may be able to get the benefits of an insider and an outsider in one package by promoting an insider who has had significant experience at other companies.

"That could be a way of getting someone who had time to learn from other companies" but still is trusted and understands the organization's culture, she said.

Experts agree that picking the right leader is a critical step for most companies.

"Some places, like the New England Patriots, seem to constantly bring in new people but always do well. They have a great system and no one is irreplaceable," Mr. Challenger said.

Generally, however, the right leader is crucial to an organization's success, he said.

"It's a very big deal," said Mr. Hambrick. CEOs "are not just figureheads."

"They make big decisions about strategy and about key people. They make key decisions about organizational structure and the incentive systems," he said.

"It can matter quite a lot."


-- Patricia Sabatini: or 412-263-3066 First Published May 3, 2013 4:00 AM


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