Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 222

CEO appointments: internal or external?

The appointment of the Chief Executive Officer (CEO) and succession planning is one of the more important responsibilities of listed company boards. When a board starts the process of replacing a CEO, the company will typically announce both an internal and an external candidate search.

Commonwealth Bank and Fortescue Metals Group are currently searching for new CEOs with each company canvassing internal and external candidates. Over recent months, Blackmores and Wesfarmers have made CEO appointments from within their executive ranks, while Primary Health Care and G8 Education have opted for outsiders.

Shareholders may then wonder, is it better to appoint an internal or an external CEO?

Internal CEO appointments

Successful companies invariably have clear CEO succession plans to ensure the business is well-positioned to manage leadership transition. Based on our investing experience, boards of these companies tend to appoint ‘tried and tested’ candidates from within to ensure the business continues to employ the winning strategy and, more importantly, maintain its culture.

PWC’s latest annual study of CEO succession revealed that the rate of internal CEO appointments had reached an all-time high in Australia. The report also found that increased internal CEO appointments, coupled with better succession practices, have led the average CEO tenure rising to 5.5 years, which exceeds the global average of 5.2 years. The report’s authors found that insider CEOs not only stay in the role longer, they deliver better and more consistent shareholder returns compared with external hires.

Companies that have consistently and successfully promoted senior managers (including CEOs) from within their organisation include Macquarie Group (ASX:MQG), Wesfarmers (ASX:WES), Challenger (ASX:CGF) and Flight Centre Travel Group (ASX:FLT).

Notably, electronics retailer JB Hi-Fi (ASX:JBH) has appointed all three of its CEOs from within the company since it listed in 2003. Over that period, the company’s share price has risen from $1.55 to more than $22.60 at the time of writing.

[Register for our free weekly newsletter and receive our latest ebook, Cuffelinks Showcase]

External CEO appointments

Outsider CEO appointments have fallen sharply since 2004 according to PWC, with internal candidates providing obvious advantages. However, external CEO appointments can provide benefits too, particularly when the company needs to be reinvigorated.

When a company is underperforming, frequently its turnaround can only be achieved by an outsider, not a manager entrenched in the business’s operations. An effective CEO, often with a new management team, can rapidly turn around the company’s fortunes delivering shareholders returns via share price growth.

When an underperforming company appoints a new CEO, we look for a strong leader and a proven performer with an articulated strategy to turnaround the company and the support of the board to effect change. When the CEO has a clear mandate from the board to ‘shake things up’ this can be a catalyst for us to take a position in the company.

Clough Limited (no longer listed on the ASX) is a prime example of an external CEO who successfully implemented a turnaround strategy. The Perth-based engineering company had floundered for many years under the leadership of various CEOs before Kevin Gallagher took the helm in 2011. The new CEO overhauled the company’s operations, reducing fixed costs and transformed the organisational culture. During his two-year tenure, the company’s share price steadily climbed from around 65 cents a share and in 2013 shareholders received $1.46 a share when South African firm Murray and Roberts Holdings acquired Clough.

In our view, the best external CEO appointees have a track record of performance in the same or a comparable industry. For example, Shaun Di Gregorio was a key person in the early success of REA Group, as it transitioned from a start-up to the largest media company in Australia as owner of online real estate advertising portal realestate.com.au. In 2010, he was appointed CEO of Malaysia-based iProperty Group that serviced the Southeast Asian property market. Shaun brought the relevant skill set, knowledge and experience to iProperty and during his four-year tenure the company’s share price rose from around 15 cents to over $3.00 a share. iProperty was subsequently taken over by REA Group in 2016 for $4.00 a share.

Alignment of interests

Whether a CEO is an internal or an external appointment, it is critical to consider how their interests are aligned with the company’s shareholders through incentive structures. Ideally, remuneration is a combination of short- and long-term incentives that focus on earnings per share (EPS) and total shareholder return (TSR). For more, see my Cuffelinks article, 5 factors to look for when assessing management.

The CEO’s interests are further aligned when they are also a major shareholder in the company. This can also ensure their long-term commitment. In our experience, CEOs with substantial ‘skin in the game’ typically have longer than average tenure and outperform other comparable businesses.

Jamie Pherous, Managing Director at Corporate Travel Management (ASX:CTD) is a substantial shareholder in the company. As founder of the business, he has led Corporate Travel Management since listing in December 2010 at $1.00 a share. The company is trading at more than $22.00 per share at the time of writing.

On balance

Considering the merits of an internal versus an external CEO appointment is highly dependent on the company, including its performance and stage of growth. In our view, companies that appoint the CEO from within the organisation on balance deliver better returns for their shareholders than companies that recruit externally. However, turnaround stories from an external appointment can provide investors with good short-term trading opportunities. When evaluating any CEO, it is critical to consider how their interests are aligned with the company’s shareholders through incentive structures and equity exposure.

 

Chris Stott is Chief Investment Officer of Wilson Asset Management. Entities managed by Wilson Asset Management own shares in PRY, CBA, GEM, FLT, MQG and WES.

RELATED ARTICLES

Why August company reporting season was poor

It’s the large stocks driving fund misery

Winners and losers in sharemarkets, 2017/18

banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 606 with weekend update

The boss of Australia’s fourth largest super fund by assets, UniSuper’s John Pearce, says Trump has declared an economic war and he’ll be reducing his US stock exposure over time. Should you follow suit?

  • 10 April 2025

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Latest Updates

Investment strategies

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Investment strategies

Does dividend investing make sense?

Dividend investing offers steady income and behavioral benefits, but its effectiveness depends on goals, market conditions, and fundamentals - especially in retirement, where it may limit full use of savings.

Economics

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Strategy

Ageing in spurts

Fascinating initial studies suggest that while we age continuously in years, our bodies age, not at a uniform rate, but in spurts at around ages 44 and 60.

Interviews

Platinum's new international funds boss shifts gears

Portfolio Manager Ted Alexander outlines the changes that he's made to Platinum's International Fund portfolio since taking charge in March, while staying true to its contrarian, value-focused roots.

Investment strategies

Four ways to capitalise on a forgotten investing megatrend

The Trump administration has not killed the multi-decade investment opportunity in decarbonisation. These four industries in particular face a step-change in demand and could reward long-term investors.

Strategy

How the election polls got it so wrong

The recent federal election outcome has puzzled many, with Labor's significant win despite a modest primary vote share. Preference flows played a crucial role, highlighting the complexity of forecasting electoral results.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.