CEO Succession: Should You Choose an Internal or External CEO?

A company’s board of directors is an integral part of its success. However, few board responsibilities are as important as choosing a CEO. In fact, most boards start developing succession plans years in advance. 

You may, then, have already run into a contentious issue: some board members will invariably believe promoting an existing employee to CEO is the best option, and others will insist on hiring an external CEO. The truth is that both choices have merit. Which one is best for your organization will depend on your current situation and your vision for the future.

Internal vs. External CEOs: An Overview

Here’s a concise overview of the pros and cons of internal and external CEOs (and when it makes sense to hire one over the other).

Internal CEOs

When it comes to choosing who will pilot a company into its next era, most boards tend to select insiders. In 2019, one study found that almost 80% of newly appointed CEOs were company insiders. There’s a good reason for that, too. Broadly speaking, “insider CEOs” tend to deliver a stronger performance than new CEOs from other organizations.

An internal CEO offers several attractive benefits for your company:

  • A sense of stability for managers, employees, board members, and shareholders
  • Existing knowledge of your company and how it works
  • Other employees see that your company rewards strong performance
  • The current CEO is able to offer valuable mentorship to their successor
  • Chance for less disruption to the successful aspects of your organization

However, internal CEOs may also pose some disadvantages. For instance, internal CEOs might:

  • Have trouble making major (but necessary) changes
  • Lack motivation to pursue new paths for growth if current strategies function well
  • Fail to bring the fresh perspectives an outsider would

In other words, if you are on the board of a high-performing company and don’t anticipate major disruptions in your sector, selecting an internal CEO is likely the best choice. Before you make that decision, though, you must evaluate candidates to ensure that they have the vision and mindset to continue to grow the company.

External CEOs

When change is on the horizon, it often makes sense to hire someone from outside the organization. Here are some of the benefits of hiring external CEOs:

  • Shows shareholders you are serious about change
  • Brings a fresh perspective that’s more likely to create meaningful change
  • Can help you navigate major industry disruptions if the candidate has specialized knowledge
  • More likely to be able to turn your company around if it’s been struggling

Of course, hiring external CEOs also has its drawbacks:

  • You don’t have the same familiarity you get with an internal candidate
  • If an external CEO cannot deliver the changes they promise, you’ll lose out on many of the advantages of outsider CEOs
  • External CEOs run the risk of clashing with your company culture, which can cause the wrong kind of disruption

Hiring an external CEO will likely come with some risks. If your company is performing poorly or having trouble adapting to new developments in the business landscape, though, it may be the right choice. 

Potential candidates should be carefully vetted. If they don’t have the kind of expert knowledge you need or are not aligned with your company values, they may do more harm to the organization than good.

A Third Option Emerges: The “Insider-Outsider” CEO

Do you wish that you could get the best of both worlds when hiring a CEO? The so-called insider-outsider CEO might just deliver on that tough brief. This is when you select a good potential CEO and hire them as a member of your leadership (but not as the CEO). Your new candidate then has time to get to know the inner workings of your company before stepping into the top spot.

This option also has the advantage of letting your CEO candidate effectively “try out” for the role. Their time with your company before their promotion serves as a sort of probationary period. If the candidate is highly motivated, fits in well with your company culture, and demonstrates a commitment to the company’s success, you should be able to confidently promote them. 

However, you might also find through the trial period that their performance falls short. In that case, you have the option to choose someone else to be your new chief executive without going through the quite arduous process of removing a CEO.

Of course, hiring an insider-outsider will not work in every single situation. For example, perhaps your current CEO is suddenly incapacitated. In such an instance, you don’t have time to onboard someone new, let them build an understanding of your company and its leadership, and then help them gracefully move into an executive role. In most cases, companies that choose this option have at least 18 months or so before the current CEO will need to step down.

One of the most successful recent examples of an insider-outsider CEO is Michelle Gass, who stepped into the Levi Strauss & Co. CEO position in 2024 after joining the company as its president in 2022. The organization hired her with the express intention of placing her as its CEO within 18 months.

CEO transitions like these are relatively rare occurrences. However, as more boards realize that insider-outsider hiring allows the company to benefit from both insider knowledge and a fresh perspective, we might just see more of these non-traditional hires in the years to come.

Your Company’s Future Is in Your Hands

Choosing your next CEO is an incredible responsibility. When you make the right choice, you can take a struggling organization and carry it to heights it’s never achieved before. Conversely, appointing the wrong CEO can cause irreparable damage.

Ultimately, it is not objectively better to choose an internal CEO or an external one. Instead, the key to success is being able to identify your organization’s pain points and determine which option will best help get your company where it needs to be.