Build or Buy: The CEO Succession Dilemma
The Question That Shapes Legacies
Three years before Aditya Puri stepped down from HDFC Bank, the board began a conversation that would determine the institution’s future. Not a rushed search triggered by resignation. Not a reactive scramble when retirement loomed. A deliberate, patient process of evaluating what the bank needed next and who could deliver it.
The result? Sashidhar Jagdishan’s seamless transition preserved performance while enabling strategic shifts in digital transformation. The bank’s continuity reflected years of intentional preparation, not fortunate circumstance.
This is succession done right. Yet for every HDFC Bank, there are cautionary tales of transitions that stumbled, cultures that fractured, strategies that stalled—all because boards treated succession as an event rather than a journey.
The choice between promoting internal talent or recruiting external leadership represents perhaps the most critical inflection point in determining a company’s trajectory. Get it right, and you build enduring institutions. Get it wrong, and you create revolving doors.
The Evidence Speaks: Why Internal Development Creates Advantage
The preference for developing leaders from within isn’t philosophical sentiment. It’s grounded in compelling evidence.
When Booz & Company analyzed 2,500 global CEO transitions, companies appointing internal successors delivered 4.4% higher shareholder returns over two years compared to external hires. This advantage proves even more pronounced in India, where internal candidates carry deeper cultural alignment and institutional knowledge.
Closer to home, the Indian School of Business examined 150 CEO transitions in BSE 500 companies between 2010 and 2020. Organizations with structured succession plans experienced 27% lower executive turnover and 18% higher three-year EBITDA growth than those conducting reactive external searches.
Consider Tata Group’s transition when N. Chandrasekaran moved from TCS CEO to Chairman of Tata Sons in 2017. The structured leadership development through Tata’s Leadership Institute enabled seamless transition. In the five years following his appointment, the Group’s market capitalization more than doubled.
These aren’t isolated examples. They represent a pattern: organizations that invest systematically in leadership development create sustainable competitive advantage that external hiring alone cannot replicate.
Yet the evidence for internal succession doesn’t eliminate the strategic value of external hiring in specific contexts. The question isn’t whether to build or buy—it’s when each approach serves the organisation’s long-term interests.
Building the Bench: A Framework for Leadership Continuity
Succession readiness transcends mere replacement planning. It’s about ensuring continuity of purpose, culture, and performance across leadership transitions.
The organizations that succeed treat CEO succession as an enterprise-wide priority embedded in governance, not a contingency plan activated by departure announcements. Based on insights from dozens of Indian boards and leadership teams, six components define effective succession architecture:
1. Align CEO Success Profiles with Future Strategy
High-performing companies continuously update CEO capability models explicitly linked to their three to five-year strategic plans. The question isn’t “Who can do today’s job?” but “Who can lead us where we need to go?”
At Hindustan Unilever, the board’s strategic committee identifies future-ready leadership competencies, then systematically develops these attributes in high-potential leaders. The capability profile evolves as strategy shifts, ensuring succession planning serves tomorrow’s needs, not yesterday’s.
2. Develop Talent Across Leadership Layers
Effective succession requires developing capabilities at multiple organizational levels, not just identifying potential CEOs.
Mahindra Group’s Leadership University exemplifies this through tiered programs—Future Leaders for emerging talent, Accelerated Leadership Development for mid-level executives, Enterprise Leadership for senior leaders. This creates robust pipelines rather than designating crown princes who may or may not be ready when succession arrives.
3. Provide Transformational Experiences
Leadership readiness emerges from challenging assignments, not classroom learning alone. Research from the Centre for Creative Leadership shows that 70% of leadership development occurs through experiential challenges.
TCS embeds this principle by rotating high-potential leaders across international markets, varied business units, and turnaround scenarios. The result? Well-rounded leaders who’ve navigated complexity before enterprise responsibility arrives, not executives promoted based on functional excellence alone.
4. Facilitate Board Visibility and Engagement
The most effective boards systematically assess internal talent through direct exposure to emerging leaders. This provides judgment beyond performance metrics.
The Aditya Birla Group conducts annual talent review sessions where board members interact with rising executives through strategic project presentations, developmental assignments, and structured mentoring. These interactions offer the board deeper insight into leadership potential—how candidates think strategically, handle pressure, engage stakeholders, navigate ambiguity.
5. Track the Market
Even companies committed to internal succession maintain relationships with executive search partners to benchmark internal talent against external alternatives. This isn’t hedging—it’s honest assessment.
Understanding what the market offers provides objective evaluation of bench strength and identifies specific capability gaps requiring focused development. It also signals to internal candidates that their development is taken seriously, that the organization invests in preparing them for enterprise roles.
6. Create Transition Discipline
Succession is an ongoing journey, not a one-time event. ICICI Bank’s seamless transitions—from K.V. Kamath to Chanda Kochhar to Sandeep Bakhshi—demonstrate how long-term planning, enterprise-wide grooming, and transition overlaps create continuity.
Each successor served in enterprise-wide roles before assuming CEO responsibilities, building relationships with key stakeholders, understanding the institution’s complexity, earning credibility across the organization. When transition arrived, they didn’t begin as strangers to the business or its people.
Succession as Strategic Stewardship
Too often, succession planning is triggered by resignation or retirement announcements. This is succession as crisis management, not strategic stewardship.
Boards that treat succession as a multi-year journey are better positioned to ensure leadership continuity and pipeline resilience. Conversely, unstructured or opaque succession processes introduce significant turbulence.
Tata Sons’ leadership transition following Cyrus Mistry’s departure illustrated the challenges that arise absent shared vision, process clarity, and cultural foresight—despite eventual stabilization under Chandrasekaran. The episode underscored how even storied institutions face disruption when succession lacks the discipline it demands.
Effective boards integrate succession planning into core governance responsibilities by:
- Reviewing CEO and CXO succession plans annually, not when departure looms
- Evaluating leadership readiness in alignment with future strategic needs, not current organizational charts
- Enabling developmental exposure across functions, geographies, and business contexts
- Facilitating structured interactions between board members and potential successors
As Ram Charan observes in Boards That Lead, “CEO succession is the ultimate test of a board’s stewardship.” Boards that get it right create enduring institutions. Those that don’t become revolving doors where leadership churn undermines strategy, culture, and performance.
The Indian Context: Unique Dynamics That Shape Succession
Leadership succession in India carries particular nuances that generic frameworks miss.
Family Business Dynamics
Approximately 79% of Indian businesses remain family-controlled, creating unique succession dynamics where ownership, management, and legacy intersect.
Progressive groups like Dabur, Godrej, and Murugappa have developed dual tracks—family members focusing on strategic roles while professionals manage operations. They’ve established family councils and governance structures that separate ownership from management, enabling both continuity of family vision and infusion of professional capability.
The challenge? Balancing family members’ aspirations with meritocratic selection while maintaining the entrepreneurial spirit that built the business. When done well, as in the Murugappa Group’s structured approach, it creates advantage. When done poorly, it creates succession crises that threaten institutional stability.
Cultural Leadership Dimensions
Research from the Indian Institute of Management Ahmedabad identifies uniquely Indian leadership traits valued across organizational contexts—managing diverse stakeholder ecosystems, navigating regulatory complexity, balancing Western management practices with Indian cultural contexts.
Internal candidates often demonstrate stronger capabilities in these dimensions given their immersion in India’s business environment. They understand the unwritten rules of relationship-driven decision-making, the delicate balance between speed and stakeholder consensus, the long-term thinking that Indian business often demands.
This isn’t about internal candidates being “better.” It’s about recognizing that effectiveness in India’s business context requires capabilities that emerge from experience, not just credentials.
Compensation Considerations
External CEO recruitment often triggers compensation dislocations. According to Aon’s 2023 Executive Compensation Survey, external CEO hires command 35-40% premiums over internal promotions, creating potential internal equity challenges.
Progressive companies address this through transparent performance-based compensation frameworks and specialized retention mechanisms for high-potential internal talent. The message: we value and invest in developing our own leaders, not just importing them.
When External Hiring Adds Strategic Value
Despite the advantages of internal succession, specific circumstances warrant external CEO recruitment. The question isn’t whether external hiring has value—it’s when that value justifies the risks and costs.
1. Transformation Imperatives
Companies facing existential disruption may require leadership capabilities absent in their current executive bench. When internal pipelines lack readiness in digital transformation, global expansion, or turnaround management, external candidates with demonstrated expertise can accelerate execution.
When Wipro appointed Thierry Delaporte in 2020 after 25 years of internally promoted CEOs, they secured leadership experienced with European markets and digital transformation capabilities essential for their strategic pivot. The external hire wasn’t about internal failure—it was about capability infusion the timeline demanded.
2. Performance Turnarounds
In periods requiring reinvention—shifting from product-led to platform-led models, entering new geographies, navigating post-merger integration—external leaders may bring needed objectivity.
Axis Bank’s appointment of Amitabh Chaudhry from HDFC Life in 2019 exemplifies how outside leadership can recalibrate strategy and performance. Chaudhry’s experience enabled Axis to address non-performing assets and reposition its business model, resulting in the bank’s market capitalization doubling within three years.
3. Investor-Driven Mandates
In private equity-backed or publicly traded companies, investors’ mandate for rapid value creation often necessitates bringing in leaders with proven track records in value acceleration, cost optimization, or IPO preparation. The timeline doesn’t allow for developing these capabilities internally.
4. Cultural Transformation or Governance Reset
Organizations facing cultural inertia, reputational challenges, or governance breakdowns may require an external CEO to drive change credibly and restore stakeholder confidence. Internal candidates, no matter how capable, may carry the weight of association with past challenges.
In each scenario, external hiring proves most effective when complemented by strong onboarding, integration support, and early engagement with key stakeholders to ensure contextual alignment. Without these, even brilliant external hires struggle.
Research from Spencer Stuart’s India practice indicates approximately 28% of CEO appointments among India’s 100 largest companies now come from outside the organization—up from 19% a decade earlier, reflecting India’s maturing executive talent marketplace.
The trend isn’t about external being “better.” It’s about Indian boards becoming more sophisticated in matching succession approach to strategic context.
The Infosys Journey: Lessons in Both Directions
Infosys’ leadership evolution offers insights into both successful internal succession and the complexities of external hiring.
The company’s strong foundation in leadership development enabled seamless transitions from N.R. Narayana Murthy to Nandan Nilekani to Kris Gopalakrishnan to S.D. Shibulal. Each transition maintained culture while evolving strategy.
However, when appointing its first external CEO, Dr. Vishal Sikka in 2014, governance challenges emerged despite Sikka’s technical credentials. His departure after three years highlighted that capability without cultural alignment creates friction, not just for CEOs but for entire organizations.
Salil Parekh’s appointment marked a return to leaders with deeper Infosys context, stabilizing the organization and reinforcing how companies oscillate between internal and external leadership based on strategic needs and previous experiences.
The lesson? Neither approach guarantees success. What matters is matching succession strategy to organizational readiness, strategic context, and the discipline with which transitions are managed.
Best Practices for Sustainable Leadership Transitions
Among Indian companies, the most successful CEO succession strategies typically combine:
Internal First
Prioritize internal development as the primary strategy, investing systematically in leadership capabilities across multiple layers.
Targeted External Hiring
Bring in external leaders only when critical capabilities cannot be built internally within required timeframes. Make it strategic choice, not default option.
Continuous Evaluation
Regularly assess internal talent against external benchmarks, providing objective validation of succession readiness and identifying development needs.
Emergency Protocols
Prepare for unforeseen transitions with clear, board-approved contingency plans. Hope for orderly succession but plan for the unexpected.
The Choice Before Boards
While external CEO appointments may be warranted in specific strategic contexts—transformation, capability infusion, crisis response—they should complement, not replace, a strong internal pipeline.
In the Indian corporate environment, where business continuity, stakeholder relationships, and cultural alignment are paramount, building internal leadership capability offers sustained advantage.
A robust, future-focused succession strategy enables organizations to:
- Reduce transition risks and maintain strategic momentum
- Retain critical institutional knowledge that takes decades to build
- Reinforce culture and performance alignment across leadership changes
Boards that consistently invest in identifying, developing, and engaging future leaders shape more than smooth transitions. They shape enduring legacies.
The question every board must answer: Are you building leaders worthy of the institution you’ve created, or hoping the market will provide them when needed?
In India’s business context, that distinction isn’t just about succession planning. It’s about whether organizations build for continuity or settle for chance.
