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Internal candidate versus an outsider

Recent headlines offer ample evidence of the financial costs and reputation risks of a poorly executed leadership transition, from internal disruption and higher compensation expenses to reduced share

Strategist Team 

Sanjay Jha

Sanjay Jha
Executive director, Dale Carnegie Training India

The of today is a near-trapeze artiste. There is not 'low', but 'no' margin for error. The truth is that the cannot single-handedly construct a company (please excuse rare geniuses like Steve Jobs, Jeff Bezos, Howard Schultz etc) but they can certainly bring a good run to an abrupt end with some ham-handed decision making. That is precisely the reason why it is important for the company to know who is its vice-captain in waiting, or a suitable Plan B in the event of a sudden departure of the 'Big Boss', whether a voluntary resignation or an unceremonious boot for whatever reasons.

The reason the board of directors are putting as a top agenda (if they are not, they should) is because the future of any organisation goes through expected turbulence during the crucial transition period. Stakeholders, particularly an inquisitive media and bullish shareholders expect change to be masterfully executed.

In fact, change is like walking on a mine-field wearing gum boots - one false step and it could affect years of corporate reputation and goodwill.

There is no magic formula for for CEOs, but two facts are indisputable: internal candidates are usually less prone to rock the boat even if they differ in styles and personality type from their predecessors. Second, companies need to be prepared for all eventualities and be open-minded to the external option. Playing it safe with internal candidates may boomerang if the chosen candidate takes it for granted that the corner office will have no competitors.

Sometimes organisations do benefit from a fresh, novel approach from a rank outsider not boxed-in by past baggage. A few years ago in the US, roughly 55 per cent of CEOs were hired from outside. I would recommend two necessary steps that the boards must take: creating a pipeline should be a prime item in a CEO's job description, beyond merely sales numbers and profitability ratios. challenges mostly happen because CEOs get cocooned in their own power-games and keep potential successors at bay. The front runner in a relay race usually believes it is his first change of baton that creates a winning team. The fact is that it requires an effortless transportation of the slippery baton as if in inscrutable synchronicity.

Given the fact that CEOs today can dramatically impact the future of organisations through their decisions on mergers and acquisitions, diversification strategies, business partnerships and new products, is HR's critical acid test. The challenge is that could actually turn out to be an oxymoron; changes have become more unpredictable recently, often at remarkably short notice. Can we really plan for it? Can it be a plug and play model? The boards must finally go with a who will be in close conformity with the corporate culture of the organisation or alter it for the better because the ramifications of a boomerang here can do long-term damage by affecting employee morale and work practices. The Tatas paid great attention to this in the intelligently articulated by which Cyrus Mistry took over from Ratan Tata.

Interestingly, Steve Jobs himself groomed an in-house successor in Tim Cook to ensure a stronger continuity for the formidable Apple brand. And so far it has worked. Maybe is fairly simple after all; just follow the horses for courses policy. Jyorden T Misra

Jyorden T Misra
Managing director, Spearhead InterSearch

The choice of hiring a from within an organisation or bringing an external candidate to fill the position depends on the sector and the next evolutionary step for the company in question. While one debate the pros and cons of both the options, it will be wise on part of companies to go for a mix of both. Interestingly, as part of sudden succession planning, some organisations have split the responsibility of a between three director-level positions. By doing so these companies have successfully accomplished the daunting task of fitting the role into a person than going through the trouble of fitting the person-role fit. Going by this system - managing director, HR and administration director and business development and operations director - all three can have equal responsibilities. In fact, companies taking this approach camouflage the entire exercise of by calling it a 'new model'.

Further the company can take a call on zeroing on the ratio of internal and external candidates. For example, external candidate can be considered if there is skill shortage within the organisation for any of the aforementioned profiles. At the same time, history of an organisation must be kept in mind while making such decisions. If the ex-had a larger than life personality and bred this culture in the company, it may be tougher to make an informed choice because employees will be averse to planning. This is where the importance of hiring an external candidate comes into play. And so this is an opportune moment to make fundamental changes in a company. At the same time, even with a sound transition strategy, chances of failure are 50 per cent. Another pain point of hiring an external candidate is whether he will adapt to a new culture.

A company's board can play a crucial role by being receptive towards disbanding hierarchies. To understand this, let us go back to the problem of skill shortage in CEOs discussed earlier. Let us assume a company decides to elevate an existing employee to a position. In the process it is discovered that the candidate who is largely competent in handling various functions is not great in treasury-related matters. In this situation, the chief financial officer can be made to report to both the and the board. For transparency, the CFO must keep the in loop during any communication with the board members. By doing so, the promoters can mitigate the risk. It is always wiser to invest in a known devil.

When it comes to handling the compensation of new CEOs, companies act penny wise and pound foolish. While it is expensive to hire an external candidate, saving a few million rupees will not make a difference. The hiring cost should be seen as an investment. Stock options are the major bone of contention here between candidates and companies no matter how hard companies try to lure then with standard bonuses and long term incentives. If an organisation is hiring a turnaround expert, it must relate growth with wear and tear. A new CEO,internal or external, may make a lot of fundamental changes. So it is becomes very important to assess the cost at which growth comes.

In the context of Indian multinational companies, is largely a generational dilemma where the first generation of promoters is too protective of the company and averse to major changes. For example, Wipro's vice-chairman Vivek Paul was a celebrated IT professional who contributed to the company's growth. By the time he quit the company, things were not fine between him and Wipro's chairman Azim Premji.

First Published: Mon, September 09 2013. 00:15 IST