The decision to appoint a new CEO is among the most critical and strategic choices a corporation can face, as it can significantly influence the organization’s future. A key consideration is whether to promote an internal candidate or recruit one from outside. While internal candidates often ensure continuity and cultural fit, external hires can bring fresh perspectives necessary for strategic renewal. However, both options involve trade-offs and are shaped by a complex interplay of organizational, cultural, and individual factors. In a new article, we explore those factors and offer insights into how they lead companies to choose one option or the other.

External hires face adjustment challenges as they familiarize themselves with a firm’s culture, internal dynamics, and strategic priorities. Moreover, boards typically have less information about external candidates, increasing the risks of such appointments. Conversely, internal candidates are more likely to understand the nuances of the organization, its culture, and its existing strategy. Their appointment may signal stability and continuity, which can reassure stakeholders.

The choice between external and internal candidates depends on several contingent factors. Firms often favor external hires in times of poor performance, as they signal a decisive break from the past and a commitment to change. In contrast, when a firm is performing well or seeks to maintain its strategic course, internal promotions are more likely. These decisions are further influenced by the composition of the board, with independent, diverse, and well-educated boards more inclined to consider external candidates. Additionally, individual characteristics of the incoming CEO, such as gender and educational background, also play a role in determining the likelihood of external appointments.

While prior studies have primarily focused on the U.S. market, our research reveals that the international context introduces additional layers of complexity. Cultural environments significantly shape CEO succession decisions. In societies where hierarchies are deeply respected, internal promotions are more common as employees and stakeholders tend to value continuity and proven internal success. Similarly, cultures characterized by a desire to avoid uncertainty favor internal candidates, who tend to minimize perceived risks associated with change. Yet individualistic cultures, which prioritize personal achievement and independence, are more open to external appointments. Interestingly, in societies that value assertiveness and material success, internal promotions dominate, reflecting a preference for leaders with established records of accomplishment within the organization.

As for the performance of external hires, the findings are nuanced. Firms often become more profitable after appointing external CEOs, particularly when these appointments follow a period of poor performance. However, this rebound effect may not necessarily indicate superior leadership but rather reflect statistical mean reversion – a natural tendency for performance to return to average levels following extreme lows. This challenges the assumption that external hires inherently drive better post-succession outcomes. Cultural factors also moderate these performance effects. In individualistic societies, external CEOs tend to perform better, likely due to the alignment between the culture’s emphasis on personal achievement and the leadership style of an external hire. However, a significant cultural distance between an external CEO and the firm can have a mixed impact. While differences in cultural values such as individualism or uncertainty avoidance can stimulate innovative approaches, they may also exacerbate integration challenges.

Our study makes several important contributions to the understanding of CEO succession decisions. By analyzing data from 18,340 CEO appointments across 37 countries over a 25-year period, it provides robust insights into the determinants and performance implications of internal versus external hires. Importantly, it highlights the role of cultural environments in shaping these decisions, an aspect that has been largely overlooked in prior research. Furthermore, the findings underscore the importance of considering long-term trends and institutional contexts in CEO selection, particularly as the executive labor market evolves.

For organizations, these insights have significant practical implications. First, boards must align CEO selection with the strategic needs of the firm. When a company requires a major transformation, recruiting an external leader with fresh perspectives may be the optimal choice. However, in stable environments where continuity is valued, promoting an internal candidate who understands the organization’s culture and strategy is likely to yield better outcomes.

Cultural considerations also play a critical role in CEO selection, particularly for multinational firms. Companies must evaluate not only the cultural fit of a candidate but also the broader cultural environment in which the organization operates. For example, in cultures that respect hierarchies or want to avoid uncertainty, internal promotions may be more effective in maintaining organizational harmony. Conversely, firms in individualistic societies may benefit from the innovative perspectives of external hires. Boards must also consider the cultural distance between an external CEO and the firm, as significant differences may either enhance performance through diversity of thought or hinder it through misalignment.

The composition of the board is another important factor. Boards that are independent, diverse, and well-educated are better equipped to assess the suitability of external candidates and manage the risks associated with such appointments. Furthermore, boards should critically evaluate the performance of external CEOs, recognizing that short-term improvements may reflect mean reversion rather than genuine leadership impact. This calls for a nuanced approach to performance evaluation, incorporating both quantitative and qualitative metrics.

Finally, organizations must prepare for CEO succession well in advance by cultivating a robust internal pipeline of leadership talent. This not only reduces dependence on external hires, but also ensures that internal candidates are well-equipped to assume the top role when the need arises. For firms operating in dynamic environments, combining internal development with strategic external appointments can strike the right balance between continuity and innovation.

The decision to appoint an internal or external CEO is far from straightforward, requiring careful consideration of organizational goals, cultural contexts, and individual candidate attributes. By understanding the nuanced factors that influence these decisions and their performance implications, firms can make more informed choices that align with their strategic objectives and cultural environments. As our study demonstrates, a one-size-fits-all approach is unlikely to succeed. Instead, boards must adopt a tailored strategy that considers the unique circumstances of each appointment, ensuring the organization’s long-term success.

This post comes to us from professors Kee-Hong Bae at York University’s Schulich School of Business, Sadok El Ghoul at the University of Alberta, Omrane Guedhami at the University of South Carolina’s Moore School of Business, and Jung Chul Park at the University of South Florida’s Muma College of Business. It is based on their recent article, “External CEOs: Determinants and Performance Implications,” available here.