The Importance of Cultivating a Successor

Whenever a high-profile CEO transition gets announced, the commentary almost immediately turns to the same conversation: Is the replacement an insider or an outsider? Did the board conduct a real search? Is this a bold move or a safe one?

It's an understandable fixation. Leadership transitions are high-stakes, highly visible, and often genuinely consequential for the direction of a business. But I think the insider/outsider framing  (as entertaining as it is for analysts and the business press) mostly misses the point.

Because by the time you're debating who to hire, the most important decisions have already been made. Or, more often, already not made.

When Succession Becomes a Crisis

Most companies treat CEO succession as a discrete event. Something you manage when it becomes necessary. A search is launched, a shortlist is assembled, a decision is made, an announcement goes out. The project has a start date and an end date, and once the new CEO is in the chair, the work is considered done.

This framing is almost entirely backwards.

Succession managed as an event is succession managed reactively. And reactive succession  (whether it's triggered by a sudden departure, a health issue, an unexpected resignation, or a board losing confidence) almost always produces worse outcomes than succession that was planned for years in advance.

The data on this is pointed. In 2023, the median one-year total shareholder return was down 8% for companies that hired external CEOs, compared to up 2% for companies that promoted internally [1]. That gap appears because insiders carry something an outsider can't be handed at the point of hire: years of accumulated institutional knowledge, established relationships, and a real understanding of the business that was built from the inside. That advantage only exists if someone was being developed intentionally.

The cost of getting this wrong is also significant. Research covering nearly 4,500 succession events found that companies forced to fire their CEO forfeit an average of $1.8 billion in shareholder value compared with companies that managed the transition through planned succession, regardless of whether the eventual replacement was an insider or outsider [2]. The planning itself is the variable, not the candidate.

Institutional Knowledge Isn't Transferable

Part of what makes this so easy to underestimate is that the most valuable organisational knowledge is almost entirely invisible. It doesn't live in documentation or onboarding materials or board decks. It lives in the minds of the people who were there, who know the real dynamics beneath the org chart, which relationships actually drive decisions, what's been tried before and why it failed, which parts of the strategy are genuinely sound and which are legacy positions nobody's had the courage to revisit.

An outside hire, regardless of how talented or experienced they are, walks in carrying assumptions shaped by entirely different contexts. Their first months are necessarily spent in a kind of managed ignorance as they gather information, build accurate mental models, and earn trust that an internal candidate would already have. The organisation absorbs an expensive gap while the new CEO works to understand what they've inherited.

Research examining firm performance during the Covid-19 crisis found that insider CEOs outperformed outsiders by 0.51% in quarterly return on assets, a difference that translates to approximately $140 million in additional annual net profit for a firm of average size [3]. The mechanism the researchers identified was straightforward: in periods of stress, the insider's familiarity with existing resources and firm-specific capabilities allowed them to act faster and more effectively. The outsider's knowledge gap, which might be tolerable in a stable environment, became a meaningful liability under pressure.

A well-prepared internal successor doesn't have that gap. They can act from day one, admittedly not perfectly, and not without their own growing pains, but from a foundation of genuine understanding rather than catch-up. That early momentum matters enormously, because the tone set in the first months of a new tenure tends to compound in both directions.

Leadership Development Is Succession Planning

The companies that consistently make good succession decisions share a common characteristic: They understand that building the bench is the plan.

This means giving high-potential leaders real responsibility, not just expanded titles or inclusion in senior meetings, but genuine ownership of outcomes that matter. It means creating conditions where future candidates can make significant decisions, occasionally get them wrong, and develop the judgment that only comes from operating at genuine stakes. You can't manufacture that kind of experience in a coaching programme or a leadership retreat. 

It also means being honest, both with yourself and with the board, about where the gaps are. Most leadership teams have a mixture of people who are genuinely ready to step up and people who are performing well in their current role but aren't yet equipped for the one above it. The distinction matters, and pretending it doesn't is one of the more common and costly errors in succession planning. Identifying who is on a trajectory toward the CEO role, and investing in closing the gaps between where they are and where they need to be, is work that has to start years before it becomes urgent.

The CEO's role in this is more active than it's often acknowledged to be. It's not enough to delegate development to the HR function and assume it's being handled. The CEO is the most important factor in shaping whether the next layer of leadership is growing into future executives or staying in the lanes they're already comfortable in. That means deliberately stretching people, creating exposure to the full breadth of the business, and being willing to have honest conversations about potential, including the uncomfortable ones.

Easy To Put Off, But Costly

One reason this work tends to get deprioritised is that it's genuinely hard to see the return on it in the short term. Leadership development is slow, and its payoff is mostly hypothetical until the moment it isn't. In a world where CEOs are under constant pressure to deliver results and put out fires, investing heavily in something that will matter most several years from now (and only in a scenario you're hoping to avoid) is a hard sell on the calendar.

But the cost of not doing it is enormous, and it tends to arrive all at once. A sudden leadership gap with no viable internal candidate forces a reactive external search, which brings all the transition risk, institutional knowledge loss, and organisational disruption that comes with it. The company pays for years of underdeveloped succession planning in a compressed window of instability at exactly the moment when stability is most needed.

The companies that avoid this are the ones that treated the investment as a strategic priority before it became a crisis.

What "Ready" Actually Looks Like

A useful test: if you as CEO were suddenly, unexpectedly unavailable tomorrow, how clearly could your board identify the right person to step in? Not someone who could hold things together temporarily, but someone who genuinely understands the business, has the trust of the leadership team, and could make meaningful strategic decisions from a position of real knowledge within weeks rather than months?

If the answer to that question is immediate and confident, your succession planning is in good shape. If it's hesitant, or if the honest answer is that there isn't a clear candidate, that's the gap worth addressing, because the work of closing it is also the work of building a stronger organisation right now.

Succession training done well produces better leaders at every level, more distributed decision-making capability, and a business that is fundamentally less dependent on any single individual. The succession event, when it eventually comes, is almost an afterthought, a moment of confirmation rather than a moment of crisis.

That's the goal. And the path to it starts well before anyone is thinking about it.

Sources:

[1] Spencer Stuart / Harvard Law School Forum on Corporate Governance — CEO Succession Practices in the Russell 3000 and S&P 500 (2024) https://corpgov.law.harvard.edu/2024/11/19/ceo-succession-practices-in-the-russell-3000-and-sp-500-3/

[2] Strategy& / PwC — The $112 Billion CEO Succession Problem (2015) https://www.strategy-business.com/article/00327

[3] Jebran et al. — Insider vs. Outsider CEO and Firm Performance: Evidence from the Covid-19 Pandemic, published in Finance Research Letters (2022), via PubMed Central https://pmc.ncbi.nlm.nih.gov/articles/PMC9167990/

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