THE BLOG
11/26/2012 04:40 pm ET | Updated Jan 26, 2013

Outsider or Insider CEO: Why Yahoo and Citigroup Leaders Have Different Success Odds

It's a busy time for two of our newest business leaders. Yahoo CEO Marissa Mayer recently held her first earnings call. Citigroup's Michael Corbat has completed his first month on the job. Both CEOs face substantial challenges in transforming their companies and setting them on a profitable path. Both come to their jobs without prior experience as a chief executive. Both replace CEOs who departed precipitously. But here the similarities end. Recruited from Google, Mayer is an external CEO successor to Yahoo's Scott Thompson. At 37, she is the youngest head of a Fortune 500 company. Corbat, 52, is an internal CEO successor to Vikram Pandit. His entire career since graduating college has been at Citi and its predecessor companies.

Does the route to a company's top spot -- outside hire versus homegrown talent -- make any difference to a CEO's effectiveness and ultimate success? Does one route have advantages over the other? Analyses of CEO succession and company performance suggest these are not trivial questions. Let's take a closer look.

Insider CEOs have a better performance track record overall. Research shows that home-grown CEOs outperform their outsider counterparts. For example, a 2011 study by the Kelley School of Business at Indiana University and management consultants A.T. Kearney looked at Standard & Poor's 500 companies that promoted CEOs exclusively from within their own ranks between 1988 and 2007. Companies included Microsoft, Intel, United Technologies, Nike, FedEx, Colgate-Palmolive, McDonald's and DuPont, among others. The study found that insider-only CEO companies outperformed other companies broadly in terms of profitability and growth. Moreover, not one single, non-financial S&P 500 company with an externally recruited CEO generated 20-year performance numbers equal to, let alone surpassing, those of insider-only CEO companies.

Outsider CEOs have twice the failure rate. Booz-Allen's 2011 CEO Succession Report of the world's 2,500 largest public companies found that from 2009 to 2011 almost twice as many external CEOswere dismissed compared to their insider counterparts (34.9 percent compared to 18.5 percent respectively).. The study also confirmed an earlier review of CEO succession trends from 2000-2009 published in the previous year.

The takeaway from these cross-industry studies is that Mayer faces significantly tougher odds of success as an outside hire than Citigroup's insider Corbat. Indeed, Yahoo stands out as a prime example of high CEO turnover with its pattern of external hires. Including Mayer, the company has had three outsider leaders since 2009. And both of her predecessors, Carol Bartz and Scott Thompson, were dismissed.

The Insider CEO Advantage. Why are the odds of success so much better for an insider CEO successor? Chief among them is the insider's familiarity with the company's unique culture and its key players and other stakeholders. The insider's institutional knowledge and relationship capital can be harnessed and directed quickly to lead strategic planning and implementation. By contrast, outsider CEOs can fail to appreciate the power of the organization's culture to support or impede their success at the helm. Or they fail to recognize soon enough the challenges of changing their company's culture to support a new business direction. Former Yahoo CEO Carol Bartz made this point recently. "It's very, very hard to affect culture. And you can get surprised thinking you're farther down the path of change than you really are because, frankly, most of us like the way things are," she said, as reported by the New York Times.

When do outsider CEOs succeed? The prospects of victory for external CEOs like Yahoo's Mayer, while daunting, are not unattainable. In fact, there are business situations where they can outperform insider CEOs.

For example, in a recent MIT Sloan Management Review article Ayse Karaevli and Edward Zajac studied insider and outsider CEO successions in the U.S. airline and chemical industries between 1972 and 2002. Their conclusion was that outsider CEOs outperformed insiders at companies with a recent history of poor performance or high company growth. (By way of caveat, the authors' definition of an "outsider" as someone who became CEO within two years of joining the company may strike some as overly broad.)

The authors also found that outsider CEOs outperformed insider successors when they replaced the senior management team with new executives. This finding suggests that wielding a new broom makes a difference in the outsider's ability to drive major change and achieve winning business results.

Implications for the new leaders of Yahoo and Citigroup. CEO Mayer's focus on improving Yahoo's culture shows an awareness of how an organization's collective DNA can make or break business strategy and execution. She also has shaken up her management team, adding new heads of finance, marketing and operations. Both actions are consistent with what research shows can improve her chances of long-term success. She also can take inspiration from highly effective outsider CEOs such as Alan Mullaly at Ford Motor Company and Louis Gerstner at IBM.

Of course, insider CEO Corbat does not have a cakewalk at Citigroup. There are many ways he can fail in navigating the firm to improved profitability. However, the odds of success are greater for him than Mayer right from the outset. Corbat has the added benefit of a hands-on mentor in chairman of the board, Michael O'Neill, himself an experienced banker.

In summary, hiring an outsider CEO is inherently a riskier proposition for corporate boards than promoting from within. The transferability of executive skills, and ultimately of leadership success, from one company to another is tricky and uncertain. Yet for troubled companies in need of turnaround or transformation, such as Yahoo, an outsider may be their best hope.