The value of recruiting insiders, whether as CEO or at lower levels, comes across in a May 30 Wall Street Journal article “An Inside Job: More Firms Opt to Recruit from Within,” which discusses how companies are recruiting internally. A sidebar titled “Chief Executives Hired Internally Outlast, Outperform their Rivals” reported on Booz and Company’s 12th Annual CEO Succession Study. The Wall Street Journal article did not discuss recruiting corporate boards of directors. But, in touting the value of internal recruits even at the CEO level, the article can stimulate thinking about the potential implications for corporate boards and the role of independent directors.
I read this Wall Street Journal article just after I finished writing my May newsletter article titled “Boards with Independent Directors May Sacrifice Strengths and Expertise.” My newsletter was sent to subscribers May 29. In my newsletter, which stressed the value of corporate directors who have experience and expertise, I agree with Baruch Lev that the role of independent directors needs rethinking, as called for in his book Winning Investors Over: Surprising Truths about Honesty, Earnings Guidance, and Other Ways to Boost Your Stock Price.
In addition to recapping what I previously wrote about the topic, my newsletter discussed how having too many independent directors can impair corporate performance. I pointed out that, unlike independent directors, board members who are suppliers or have other ties to a company can have valuable experience with the business due to those ties. That experience is something independent directors without ties to the company can lack. As a result of that experience, strengths and expertise develop. And, as my 25+ years of research finds, it is by building upon strengths and expertise that companies succeed. So, I agree with Baruch Lev who says in his book that “the evidence in support of expertise, not necessarily independence, is overwhelming.”
What the Wall Street Journal article presents about recruiting from within reinforces the importance of expertise. As I see it in light of my research, internal recruits outperform their rivals because their experience within the firm lets them develop expertise not only based upon knowledge of the business, but also upon understanding the nature of personal relationships that get things done in that particular company or industry. As the Wall Street Journal article points out, more and more companies are recognizing and tapping the value of internal recruits. And, the Booz CEO study in the Wall Street Journal article’s sidebar essentially suggests that expertise is important at the very top of a company.
Yet, despite the expertise value of internal recruits, recent policy regarding corporate boards has favored adding directors with no ties to the company. These independent directors have replaced board members who are suppliers or who have other ties to the company or its CEO. But, like CEOs hired from within, non-independent directors can have greater knowledge and experience as a result of those ties to the company. And, knowledge and experience foster business success. Yet, over the last several years we have been banishing it from corporate boards. How can we expect corporations to achieve top performance when we essentially require that those involved at a firm’s very pinnacle are primarily individuals who lack experience with the company?
This does not mean that boards should consist of insider corporate executives. But, it does mean that outsiders sitting on corporate boards should include more individuals with some type of ties to, which frequently means experience with, the corporation on whose board they serve. Not all directors must have such ties. Yet, the advantage of having directors whose ties to a company bring valuable experience should not be ignored. It can parallel the recruit from within advantage seen for CEOs and for corporate staffers.
That Wall Street Journal article makes a case for more hiring of candidates who have experience with a company and tells how companies are doing it. Findings from my 25+ years researching business success and failure patterns also identified the value of experience. As more and more sources point to its value, shouldn’t experience once again be integrated into boardrooms, the highest echelons of the corporate world?
