When the better choice is devil you don't know

One of the hardest things for a child to learn is that the easiest choice is not always the best one.

It's a lesson that sometimes gets forgotten when it's time for boards of directors to choose a new person to lead their company or organization.

Because this is the single most important decision any board will make, the pressure not to blow it is immense. In this context, picking among accomplished insiders seems the safest choice. They bring institutional knowledge and require a relatively short learning curve. Best of all, they can get to work immediately without the troubling distractions of having to find a new home, relocate their family, figure out the shortest commute to the office and the correct way to pronounce Nicollet.

But insiders carry less-obvious baggage. They may be blind to the organization's weaknesses or unrealized potential. They may be beholden to internal groups or power blocs. They may be tone deaf to the concerns of their customers.

In the past few months we have seen multiple examples, from the private and public sector, that illustrate some of the risks a board faces when it limits its menu to home cooking.

MTS Systems: Laura Hamilton joined the company in 1999 and became its CEO in 2008 when her predecessor, Sidney "Chip" Emery stepped down. In a letter to shareholders later that year, after MTS had negotiated a plea agreement with the government to criminal violations of export laws, Hamilton pledged that the company had spent six years cleaning up and strengthening its internal controls to "eliminate the risk of errors in the future."

Not quite. In January, the company was again suspended from doing business with the government. Worse, an investigation that began over improper filing of disclosure statements has broadened to include a grand jury review of broader export controls -- the very thing Hamilton had said was fixed.

Minneapolis Public Schools: The Minneapolis school board didn't even bother to conduct a formal search for a new superintendent when it named then Deputy Superintendent Bernadeia Johnson as its only candidate. The district had been through four superintendents in seven years -- including a disastrous experience with one outsider -- and was craving the stability, continuity and focus Johnson offered.

Johnson is a highly regarded educator, but her first 15 months on the job have included numerous administrative missteps. None was more bewildering than her decision to spend $165,000 on a salary survey to determine if some longtime colleagues and co-workers were underpaid. Study in hand, Johnson then awarded more than a quarter of a million dollars in retroactive pay raises to 35 highly paid administrators without informing the school board ahead of time. The raises came even as the district was cutting jobs, including 52 teaching positions, to plug a multimillion-dollar budget deficit.

Regis Corp: After months of pressure to shake things up and right its flagging fortunes, longtime CEO Paul Finkelstein relinquished the duties of president to Randy Pearce, who has worked at the company for 26 years, including most recently as its chief financial officer. Not surprisingly, things have gotten worse at Regis since then, not better. In the company's recently completed fourth quarter, it lost $16.9 million, and sales at stores open at least a year fell 3.6 percent. Now, a New York-based hedge fund is pushing Regis to sell some assets and cut costs by $100 million. It's also campaigning for two seats on Regis' board.

Don't get me wrong. Not all inside hires are doomed to fail, and some companies are exceptionally good at grooming future leaders. But boards have an obligation to at least consider an outside candidate, if only to confirm that the insider is the best choice.

Hiring an outsider is always the riskier choice. I think this is particularly true in Minnesota, home to 20 or so Fortune 500 companies that were for many generations run by members of the founding families. The transition to professional, non-family members may be decades old, but we seem to be more suspicious of outsiders who come here to run our companies.

Management guru Ram Charan, who has written extensively about corporate governance and leadership, says it's when an organization "is on a good trajectory [and] no radical changes are required in the company's direction, organization or people."

How many companies do you know that fit that bill?