Research Brief

CEO Succession: Execs Running a Subsidiary Offer a Balance Between Insider and Outsider

In an analysis of transitions from 1993 to 2017, they wrung more from operations facing tumult

The corporate task of choosing the successor to a CEO has never been more important. Just as workers burned out working through the pandemic, so, it seems, did CEOs. 

More than 1,400 CEOs quit during the first nine months of 2023, according to the global outplacement and executive coaching firm, Challenger, Gray & Christmas. That’s 47% more than last year and the most since Challenger began tracking CEO departures in 2002.  

Typically, the CEO selection process revolves around a basic question: Do we choose a company insider or an outsider? Boards tend to elevate company insiders to the top job during times of stability. They tend to recruit CEOs from other companies or industries when business conditions are changing and call for layoffs, spending cuts or other difficult and unpopular changes. 

But outsiders often fail, according to numerous studies. So, too, can even the most carefully chosen insiders if they’ve become entangled in corporate politics and overly invested in company traditions. A case in point, Jeff Immelt, was carefully hand-picked by Jack Welch to be his successor at GE. Immelt is now blamed for running the company into the ground, in part by trying to perpetuate Welch’s can-do culture when GE could no longer achieve its overly optimistic goals. 

The Best of Both Worlds

A working paper by UCLA Anderson’s Tingyu Du, a Ph.D. student, suggests a different way to approach the CEO selection process. Instead of framing the choice as between insiders and outsiders, directors might want to sharpen their focus on a group of candidates who blend the perspectives of both: executives who’ve run their companies’ subsidiaries. 

A subsidiary executive, Du theorizes, is likely to be enough of an insider to understand the parent company’s operations and needs, yet dispassionate enough to lay off workers, cut capital spending, shed and buy businesses, and make other tough decisions during periods of increasing competition, instability and unpredictability. 

She points to Greg Creed, former CEO of Yum! Brands as an example. Creed took the helm of the restaurant conglomerate in 2015 when its China business was losing steam and companies like Grubhub were upending restaurant takeout and delivery. Yum! Brands is the parent company of Taco Bell, KFC, Pizza Hut and, at the time, several other restaurant chains. 

Creed, as the former CEO of Taco Bell, was well positioned to address the parent company’s challenges. Benefiting from an insider’s perspective, Creed cut costs by building the company’s franchise business. Creed’s experience at Taco Bell and his arm’s length relationship from corporate headquarters likely helped enable him to take bold, clear-eyed actions like spinning off the company’s China business and buying Grubhub, shielding the company’s restaurants from delivery fees. 

Some prior research also looked at other types of CEO candidates who, like subsidiary executives, have the perspectives of both insider and outsider. Those include executives who return to a company after working elsewhere or internal candidates who would leap over more senior executives — chief operating officer and chief financial officer are most often tapped to replace a CEO — for the top job. 

Du’s study adds to that research by examining the conditions in which former subsidiary executives like Creed are promoted to the top job and the subsequent performance of their companies. 

Hybrid CEOs Handle Crisis Better?

Du gathered data from 1,450 public companies from 1993 to 2017 and examined the circumstances of each of 2,071 CEO transitions that occurred during that time. She compared the companies’ performance in the three years preceding and three years following the transitions. 

One-third of the CEOs in her study had been promoted from company subsidiaries. The remaining CEOs were split between more traditional insiders and outsiders.

Du’s analysis indicates that a company’s board is more likely to promote a CEO from a subsidiary when a company is facing a period of industry volatility. The same was not true of insider or outsider candidates.

Du compared return on assets in the three years before and after each CEO transition. Her analysis suggests that, in general, it made little difference to a company’s performance if a newly appointed CEO had come from a subsidiary unless the parent company faced external turbulence. During periods of industry instability, her analysis suggests that the appointment of a CEO promoted from a subsidiary is associated with a 3.5% increase in post-succession ROA compared with companies led by an outsider CEO and a 4% increase in ROA compared with companies led by an insider.  

Du’s research indicates that companies run by these hybrid CEOs, as she calls them, were likely to be more resilient and more aggressive than other companies in tackling challenges during times of crisis. In the run-up to the 2008 subprime mortgage crisis, particularly among firms that were strongly affected, companies run by hybrid CEOs were associated with a 7% to 11% increase in post-succession ROA compared with companies run by insider and outsider CEOs, according to her analysis. They laid off 6.8% more of their workforces than companies run by insider CEOs and about the same percentage as those run by outsider CEOs. They cut capital spending more aggressively than either of the other two groups. However, Du found no significant difference in research and development spending among all the companies.

“This suggests that hybrid CEOs tend to focus on immediate rather than long-term strategies in the face of a crisis,” Du writes. “This approach could play a key role in preserving their firms’ competitiveness.”

Featured Faculty

About the Research

Du, T.  (2023). Best of Both Worlds: The Advantages of Hybrid CEOs in Multi-Unit Firms.

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