The best way to replace a CEO may be to groom a replacement from within.

With increased turnover and shorter tenures, the CEO position has become a revolving door in corporate America, with many organizations bringing in new talent from the outside to lead their companies to better days. However, according to new research by Rice University’s Yan Zhang, the best method for hiring a CEO may be to groom from within — even if the company is struggling.

In 2003, CEOs leaving office in America had tenures averaging only about five years. Today, companies continue to fire and hire their top executive, repeatedly looking for big-name, big-results replacements from the outside. Yet too often they fail, and the cycle begins anew. Yan (Anthea) Zhang, assistant professor of strategic management at Rice University’s Jones School of Graduate Management, calls the high turnover trend a “CEO succession crisis.” Her research paper, “Organizational Dynamics,” co-written with Nandini Rajagopalan of the University of Southern California and published earlier this year, suggests that the best approach, even in the most challenging of situations, is not to look outside the company, but instead to groom an heir apparent from within.

“Why do so many firms fire their CEOs in such a short time period? It’s because they don’t meet expectations,” said Zhang. “But the more important question is, Why can’t they meet those expectations? That’s because the company or board of directors might not have picked the right person for the position to begin with.”

Evaluating three different forms of succession (heirs apparent, other internal executives and outsiders) in more than 200 CEO changes in publicly traded, nondiversified U.S. manufacturing companies over a six-year period in the mid-1990s, Zhang and Rajagopalan found that grooming from within is most often the best option — even when a company is not doing well — which contradicts how companies have traditionally reacted.

“An outsider faces great pressure to turn a company around or lead the organization to increased success, but they don’t have the firm-specific skills to do so,” said Zhang. In contrast, a groomed heir apparent has the interpersonal skills that work within the company. In performing some of the responsibilities before the official appointment, the heir apparent has already shown his or her ability to lead as CEO.

“It’s a natural thing for companies to want to hire new CEOs from the outside when performance is bad, but our research shows that is not the most effective,” said Zhang. “Just because an outside candidate will likely bring in change and new skills does not mean those changes will work well in the organization.” A grooming process, in contrast, reduces the amount of turbulence during a CEO’s departure. It allows the candidate and the firm time to get acquainted while also providing an immediate backup should something unexpected happen to the company’s current head.

Another common practice is for companies to run an internal “horse race” among non-heir-apparent candidates vying for the top post. The authors found that this form of CEO succession should be avoided at all costs. The problem lies not only in the lack of a grooming period, but also in the fact that the losers in the internal race frequently leave the firm upon word of the decision. It makes for a volatile situation in the highest executive ranks that can poison the entire organization.

The authors suggest that the one environment in which outside candidates may be best-suited is when a company is facing unprecedented industry instability. For example, when Kodak was confronting the shift from film to digital and the retirement of longtime CEO Daniel Carp, the company looked outside the organization for someone with digital expertise. It found its successor in Antonio Perez, who had previously run Hewlett-Packard’s digital-imaging businesses.

The article is laced with similar examples from corporate America over the past decade. The most telling may have been at Xerox, where an outside CEO hired in 2000 lasted only 13 months before a longtime executive from within the company, Anne Mulcahy, was groomed and then promoted to CEO, bringing the company back from the edge of bankruptcy.

Zhang is currently working on two new projects expanding on the CEO succession theme of her research: a study of CEO succession in China and an update to her current research on CEO succession with consideration for recent accounting scandals in the U.S.

For more information at http://www.rice.edu