UK companies increasingly looking outside firm for new bosses - PwC

The annual CEO Success Study, carried out by Strategy&, PwC’s strategy consulting business, tracks CEO succession at the world’s largest public companies (2,500 globally, 300 in the UK).

It showed that over half (58 per cent) of all CEO appointments to UK companies in 2015 were external hires. This is a record high for the UK since the study started in 2004 and much higher than the four year average of 40 per cent.

This goes against the global norm, where the majority of companies continue to promote people already working at the company to the CEO position. Only 23 per cent of companies globally appointed an external hire as CEO last year.

However, the research indicates that UK companies’ decision to hire from outside of the company isn’t necessarily paying off. Over the last four years, nearly three in ten (29 per cent) external CEOs who left the company were forced out, compared to only two in ten (19 per cent) of internal CEO hires. If you remove the CEOs that left via M&A, four in ten external CEOs were forced out compared to just 23 per cent of insider CEOs.

CEO turnover is also at a record high in the UK, at 19.3 per cent in 2015 (2014: 18.3 per cent). Only Brazil, Russia, India and Japan had a higher CEO turnover rate than the UK last year.

Ashley Unwin, UK consulting leader at PwC, said: “Hiring a CEO from outside the company used to be seen as a last resort. That is not the case anymore, as UK companies are making more external CEO hires than ever before. This strategy seems to be paying off for companies globally as external hire CEOs are delivering higher total shareholder returns over the past three years. The opposite is true in the UK, where external CEO hires are underperforming their internal peers.

“The high proportion of external CEO hires in the UK who are then subsequently pushed out of the company raises concerns that UK companies’ succession planning is falling short.”

Gary Neilson, principal at Strategy&, said: “Boards of directors following well thought-through succession plans should have a deep bench of strong, internal candidates. However, when the company needs to make transformational changes boards should factor the outsider option into their succession planning.

“Whether the new leader comes from inside or outside the organisation, companies than plan for CEO succession more carefully are more likely to be better performing companies in general.”

The research reveals that women are still underrepresented at the highest level in UK companies, with only two women appointed to the CEO position in the past year out of a potential of 44 roles (4.5 per cent). This is down from 5 out of 47 CEO appointments in 2014 (10.6 per cent). Globally, just 10 out of 359 incoming CEOs were women. However, this is the third year in a row that there has been at least one incoming woman CEO in the top 300 UK companies.

Globally, the research finds that female CEOs are more likely to be hired from outside of the company than male CEOs are. Nearly a third (32 per cent) of all incoming and outgoing female CEOs from 2004 to 2015 were outsiders compared to just 23 per cent of male CEOs.

Mr Unwin, added: “Great progress has been made getting more women into board roles in UK companies, but our research reinforces why that momentum needs to be maintained at the executive level. Companies should be challenging themselves on why they don’t have more women poised to take on executive level roles. They should work to identify and build their future pipeline of women leaders, and continue to monitor their progress. The executive level is where women and diverse leadership teams can make a tangible difference to the culture and management of a business.”