Why companies are tapping the boardroom for their next CEO

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FTSE companies hunting for their next chief executive may not need to look further than their own boardroom. 

Consumer goods group Unilever, retailer John Lewis, financial services provider Hargreaves Lansdown and telecoms operator BT have in the past year all appointed a CEO who was already a non-executive director on their board.

At a time of geopolitical and economic uncertainty it seems that when it comes to leadership, company chairs and their colleagues believe it is better the devil you know. 

There are previous examples of the trend. Amanda Blanc, chief executive of insurer Aviva, and Warren East, the former head of Rolls-Royce, were non-executive directors, as was the head of Pearson, Andy Bird, and Simon Thompson, of Royal Mail, who both announced this year that they were stepping down.

In fact, of the 59 FTSE 350 chief executives who have started in their roles since January 2022, a third served on the board before their appointment, according to headhunter Spencer Stuart. In the US — where it is less common to have been on the board prior to taking the top job — 17 per cent of the 245 S&P 1500 chiefs appointed since the start of last year were company directors before they became the boss. 

The upside of recruiting an existing director as chief executive is that — in theory — they already have a good working relationship with the company chair, the rest of the board and the executive team.

These so-called insider-outsider candidates are separate enough from the leadership team that they can make changes but they understand the culture, strategy and business model of a company and have had a front-row seat to any troubles it may be facing. “They know the company and likely know where the bodies are buried,” said Kit Bingham, head of the UK board practice at executive search firm Heidrick & Struggles.

This is a particular benefit as chief executive departures have been on the rise. Bill Adams, a leadership consultant and coach, said he was seeing the stress in the business environment find its way into the boardroom, with relationships between chairs and CEOs fraying at a higher rate. “There has been so much pressure built up over the past three years that these relationships have dramatically changed,” he noted.

In such an environment, it is only sensible that chairs turn to their colleagues on the board as potential CEO candidates. As one FTSE chair told me recently, “For the first time, I feel non-exec directors really are an option I should be actively considering. They are no longer an afterthought.”

Greater pressures on boards mean chairs have already been prioritising experience among new director appointments.

Some of these board members may be looking to return to more hands-on roles. “Some non-executive directors . . . attempt to have a plural career [involving multiple directorships] but then they miss the cut and thrust of executive life,” added Bingham.

However, appointing a board member can also be a sign of weakness. It can be indicative of a lack of imagination, an inadequate talent pipeline, poor succession planning, risk aversion or a manifestation of a panicked leadership. It can trigger criticism similar to that thrown at companies including Disney and Starbucks when they reappointed former chief executives.

“In times of heightened risk when you need innovation and new thinking, some boards go for security and turn to old hands,” said Sabine Dembkowski, who runs an independent consultancy aimed at making boardrooms run better. “This is sad. You need exactly the opposite. But this is a natural tendency. When something is deemed risky and uncomfortable, you seek out safety.”

Trust between non-executive directors and corporate leadership teams could also break down if executives thought board members were competitors for the CEO job.

Putting a board director in as interim chief executive after an unplanned departure, while a broader search takes place, may make more sense. It means the company does not have to shift a top executive into the CEO role temporarily, who then may feel they have to leave if they do not ultimately secure the top job. Headhunters and sector equity analysts said this could be a concern for oil major BP, for example, which appointed Murray Auchincloss, the former chief financial officer, as interim chief executive after Bernard Looney resigned.

As chairs seek out safety and stability in times of crisis, transitions from the board to the top executive role are likely to endure.

anjli.raval@ft.com