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The Rise Of The Outsider CEO

Ralph Lauren RL +0.59% made news last September when he announced he was stepping down as chief executive officer after nearly 50 years at the fashion empire that bears his name. Instead of promoting from within the company, as he had tended to do throughout his career, Lauren reached out to a rising star at another firm – Swedish retail executive Stefan Larsson, whose accomplishments include driving successful international expansion over a 15-year career at H&M and engineering an impressive turnaround of Gap GPS +0.17%’s Old Navy division.

But in this move, as in many others during his long career, Lauren was in tune with the times. Hiring an executive from outside a company to serve as chief executive officer used to be seen as a last resort—something that typically happened when a board of directors had to force out the incumbent CEO suddenly, or had failed to groom a suitable successor, or both. Over the last several years, however, more companies are deliberately choosing an outsider CEO—more often than not as part of a planned succession. As part of the 2015 CEO Success study, conducted by Strategy&, PwC’s strategy consulting business, we looked back at 12 years of detailed data on incoming CEOs at the largest 2,500 public companies. We found that boards selected outsiders in 22 percent of planned turnovers from 2012 through 2015, up from 14 percent in 2004 – 2007. And 74 percent of all the incoming outsider CEOs in 2012 – 2015 were brought in during planned turnovers, up from 43 percent in 2004 – 2007.

Why are a higher proportion of large companies choosing new CEOs from outside? We find that several major structural factors shaping the business environment are encouraging boards to widen their search for a more diverse set of competencies and backgrounds.

Discontinuous change is the principal reason that more companies are turning to outsiders. Some industries, such as energy, are reeling from large and unusual swings in supply, demand, and prices. Others, such as telecommunication services, are moving from an asset-intensive to a consumer-intensive business model. Industries such as utilities and banking are adapting to major changes in regulatory policies. And in nearly all sectors, companies are rethinking their business models in reaction to the rise of digitization.

Companies facing these kinds of challenges may require leaders with experiences and skill sets that are different from the ones that can be found within the company’s current management ranks. Internal CEO candidates may have excellent records executing the past — and even present — business models. But these candidates may lack the skills needed to lead the companies through the transformations that will be necessary to succeed in the future, and the boards know it.

Our data shows that industries that have been most affected by discontinuities are those that have brought in a higher-than-average share of outsiders over the last several years. In telecommunication services, for example, outsiders made up 38 percent of incoming CEOs from 2012 to 2015, compared with the 24 percent average for all companies. Utilities had the next-highest share from 2012 to 2015 (32 percent), followed by healthcare (29 percent), energy (28 percent), and consumer staples and financial services (both 26 percent).

A second reason for the outsider trend is institutional change in the governance and leadership of companies. Boards of directors have become much more independent in recent years, due both to regulatory changes made in the wake of the many post-2000 corporate governance scandals and to an overall drive for better corporate governance. In 2015, according to the Spencer Stuart Board Index, 84 percent of all board directors of S&P 500 companies were independent, and 29 percent of boards had a truly independent chair, up from 9 percent in 2005. The days of the 20th-century “imperial CEO” presiding over a board made up of insider directors are fading. The share of incoming CEOs also named board chair has fallen precipitously over the last 12 years, and hit a record low of 7 percent in 2015.