CEO hiring: The outsider effect

Outsider CEOs were found to be better suited than insider CEOs according to a KWR study that compared the performance of ‘insider’ and ‘outsider’ chief executive officers in the mobile telecoms operator (telco) sector of emerging markets (EMs) in the Middle East and Africa (MEA), and Asia-Pacific (APAC).
Sean Rutter, the managing director of KWR
Sean Rutter, the managing director of KWR
Outsider versus insider CEO, Should the CEO be an insider, Telecom CEO, Transformation of telcos

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Telecom operators in emerging markets perform better when they hire an outsider as CEO than by appointing an insider, according to a new research report by emerging markets-focused executive search firm KWR.

Outsider CEOs were found to be better suited than insider CEOs according to a KWR study that compared the performance of ‘insider’ and ‘outsider’ chief executive officers in the mobile telecoms operator (telco) sector of emerging markets (EMs) in the Middle East and Africa (MEA), and Asia-Pacific (APAC).

While ‘insider’ CEOs are the ones promoted from within an organisation or its affiliates;, ‘outsider’ CEOs refer to the CEOs recruited from outside an organisation or its affiliates.

To further support these findings, another research report by Spencer Stuart had also found that insiders perform more consistently when their companies are in a healthy state at the time of appointment, whereas outsiders perform better when the company is in some form of crisis.

According to Rice University associate professor of strategic management Yan Zhang: “Generally speaking, CEOs recruited from outside the firm are more likely to make bolder changes than CEOs promoted from within the firm because outsider CEOs bring new perspectives and experience, and they are not bound by prior ‘social contracts’ with the firm’s other constituents - for example, employees. As a result, they are less likely to hesitate to make changes - especially changes such as cost-cutting and employee layoffs.”

CommsMEA spoke to Sean Rutter, the managing director of KWR to further delve into the findings.

CommsMEA: Why and when are outsider CEOs hired in the regional telcos?

Sean Rutter: An outsider tends to get hired depending on the culture and governance of the organisation. More often than not, an outsider CEO is hired when the company has a problem, such as a governance scandal, a decline in market share or profitability or a need to accelerate transformation. In some cases, operators hire outsiders to refresh the organisation and bring in new DNA.

CommsMEA: Comparing an insider CEO to an outsider one, what are the pros and cons of both?

Rutter: It’s all situational-based. For instance, you will have some insider CEOs who are absolutely brilliant. A key success factor is often a great relationship with the government and other important stakeholders. Insiders are usually trusted persons and tend to know all of the inner workings of the business and have great internal relationships.

On the other hand, there might be a situation of increasing decline in profitability, the company hasn’t managed to see any radical change and might wish to bring in an outsider. Operator groups all over the world are facing market saturation and a decline in top line revenue due to the effect of OTT players. So, telcos take the decision to go for a transformation to create a business that’s more profitable and that usually means cutting complexity costs and waste.

Typically, it’s relatively easier for outsiders to come in and make in radical changes because they don’t have any existing relationships, and they don’t owe anyone anything. They can be very dispassionate. They are in a hurry and since they have been specifically brought in to prove something, that’s a huge driving force for change. Sometimes, an insider is the best choice. But as markets are getting tougher, and the rate of disruption and challenges for mobile operators are snowballing, transformation needs to happen, this transformation needs to be really fast. Outsiders usually have the mandate to make radical changes with more speed and with a sense of urgency. An outsider CEO is typically highly focussed and acts faster.

An insider CEO may also have a track record of success within the organisation that an outsider CEO would lack. However, an outsider CEO has a key advantage over an insider CEO: he or she – normally – is a proven leader, who has experience of the specific problem an organisation faces. By appointing a strong outsider CEO – a person who has executed comparable CEO roles within the industry – a board knows it is hiring a leader. In challenging markets, or in times of economic uncertainty, leadership can prove invaluable.

CommsMEA: But how is it that the findings show higher revenue increase for insider CEOs while for other parameters, outsider CEOs seem to be performing better?

Rutter: Taken in isolation, a revenue growth figure tells us more about consumer utilisation of a product or service than it does about a CEO’s ability to manage the organisation responsible for producing it or for generating returns for investors. There are a couple of reasons why insiders have higher revenues. One is they have had a longer tenure and there is a big temptation because of legacy, that operators need to keep growing the top line. However, in the attempt to grow the top line, companies can lose the battle on the profitability front. For example, an operator can increase revenues by cutting customer tariffs; so they can have lots of revenue coming on the top line but that’s at the expense of making profits. Many of the insiders came up in the industry during the 1990s and 2000s when we had absolutely huge growth. They had profitability; they had growth and were producing cash. But of late, though top line revenues may have grown or stayed unchanged, profitability has gone down.

CommsMEA: This report talks about the telecom CEOs in emerging markets. Have you carried similar studies for mature reports? If yes, what are the findings there?

Rutter: The disclosure and transparency in emerging markets has improved substantially over last few years; however, there is still a long way to go. Mature markets fare a lot better in terms of transparency and disclosure.

We haven’t done a specific study for mature markets’ telcos. However, generally in the more mature markets, across all industries, it’s been observed that insider CEOs always perform better than outsider CEOs, and it has always been the case. However, we had no idea whether it’s true for emerging markets, and that was one of the reasons that prompted this survey in the first place. But when we did conduct research, it was found that outsider CEOs perform better than insider CEOs across several metrics.

According to PWC’s 2015 “Rise of the Outsider CEO” study, the TMT sector has the highest incidence of hiring an outsider as a CEO. And this is a trend that’s going to continue because of the rapid pace at which the industry is changing. The bigger the organisations, the heavier they are. It takes a long time for them to catch up to the pace of change. There are very few operator groups, especially if you look at the government owned ones, which are lean and agile.

CommsMEA: Who would make a successful telecom CEO in a regional telco in the current scenario?

Rutter: A CEO is not going to be successful unless they have an exceptionally strong mandate from the Board of Directors and the investors. When you propose change to transform the business, the Board and the shareholders can be under a lot of pressure to reduce the change. If they don’t have the commitment, it can pose problems.

In my opinion, a successful CEO is one who is aware of his or her blind spots. It has been proven time and again that the ‘emperor’ mentality doesn’t work. People with such mentality might bring in great returns in the short term, but in the long term, they do no good. The best CEOs I have worked with are quite humble, they don’t have the ‘emperor’ complex, and they surround themselves with people who challenge them, not people who blindly do as they say. Especially, in the present day scenario, good CEOs encourage a diverse team, who can challenge them. When it comes to sacred cows, nothing is sacred if it doesn’t bring real solid value to the business and should be changed if needs be.

A business leader in today’s age needs to be very steely. One needs to be an exceptionally good executor in order to bring rapid change and one needs to be focused and exceptionally fast but not hasty. The speed and pace of change is what makes a very good CEO.

As the speed of technological progress increases over the coming years, it is likely the telecommunications industry as a whole will require more leaders who are able to implement change proactively, as opposed to reactively: this will require CEOs to be comfortable with embracing new methodologies.

CommsMEA: Apart from the CEO, which executives in the senior management are most crucial to driving changes in this region?

Rutter: I don’t think it’s any one individual; rather it’s the team that matters. If there’s an operator in which only the CEO or the CFO is really driving change, then, there is a unity of purpose problem. What this means is businesses that are really driving change and are really effective don’t have just one superstar. A great team is where the functions overlap, that is to say a good CFO will understand the pressures the CCO has with regard to pricing, brand or positioning, and likewise a good CCO will be able to understand balance sheets and investor relations, a CTO will understand the real financial implications of selling off towers or proper governance standards. Only a diverse team of experts can drive change and improve performance at a fast pace.

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