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Of Standard & Poor’s 25 CEOs, three are founders, 21 have been selected from within the company and only one has been recruited from outside. The exception is Alfred Francis Kelly Jr., CEO of Visa, who was recruited from American Express, the same field of business (see attached table).

So the executives of all these best US listed companies are well versed in the field in which their company operates. Such a 100% coincidence cannot be a coincidence, but indicates a telling rule – the knowledge of the company’s manager creates a strong advantage.

Many of the largest companies on the Tallinn Stock Exchange have also chosen a manager from within the company, such as Tallinna Kaubamaja, LHV Grupp and Tallinna Vesi, but the two largest – Tallink Grupp and the Port of Tallinn – have recruited a manager from outside. In the latter case, you can succeed in the long run if the company manager makes the field very clear to himself.

The advantage of knowing the field

In 2018, researchers at the University of Washington, Trey Cummings and Anne Marie K, published a large-scale study which shows that 70% of the CEOs of listed companies recruited between 1992 and 2013 were selected from within the company and that their R&D investments were 5-7% more profitable than companies that recruited managers from outside. In the case of an externally recruited company manager, the profitability of innovation was lower the more the manager of the company was recruited from the distant field of activity and the more the company depended on innovation (R&D intensity). This means that the field manager’s knowledge of the field – technological expertise – determines the company’s innovation advantage.

The same study found that companies that link a manager’s salary to long-term financial performance (paying most of the salary in shares and options) motivate the company’s manager to invest much more in innovation. However, in the case of managers of externally recruited companies, such an effect was lacking, ie the possibility to receive higher remuneration for consistently good financial results did not motivate externally recruited managers to invest more in innovation. This result is not surprising, as a lack of knowledge of the field makes it difficult for a manager to make risky investment decisions and therefore avoids them.

Innovative succession

The conclusion here is obvious – a company CEO should be chosen from within the company, as this increases the likelihood that the company will be successful in innovation. This knowledge also places the creation of succession in a very important place, because successiong is not just a nice thing in itself, but is vital for future innovation. Thus, when selecting middle managers, the potential of candidates to work as a member of the top management in the future should be assessed, and when selecting the latter, their potential to work as a company manager. Should there be a situation where there are several managers with excellent potential in the top management, not all of whom can manage the same company, it is very reasonable for those who leave to choose a company in the same or a similar field.

It is important to understand that knowledge of the field alone is not enough, but that it creates the necessary precondition for much more important – making profitable investment decisions in innovation. That this is a big challenge is shown by the case of Microsoft CEO Steve Ballmer (2000-2014), who was promoted to CEO from within the company and knew the field well, but made a series of bad investment decisions that led to the acquisition of Nokia’s mobile phone business in 2013, when he was finally fired.

When selecting a CEO, it is necessary to assess how profitable investments the candidate has made in his/her previous job. In order to be able to assess this among the succession, innovation must be expected, enabled and recognized by top and middle managers. In this way, every manager should constantly develope, innovate and learn from experience. Of course, a CEO must also have other good leadership qualities, such as excellent leadership skills, etc., but these qualities cannot compensate for the weakness in managing innovation.

* Robert A. Iger is now chairman of the board of Walt Disney, as the company has been managed by CEO Bob Chapek since February 20, 2020, who was recruited from within the company.