I'd always figured (based on offhand comments by Ev and his investors at the time) that it was because Ev had difficulty taking a hard-line on people for performance issues. The quote I'm thinking of was something like "Evan always wanted his friends to share in his success", and it was in the context of hiring friends or promoting internal employees into larger roles rather than looking outside the company. My read on that is that he placed a very high premium on loyalty, rewarding people who had helped out Twitter when it was very young, while the board wanted to capitalize on its hotness to bring in big external talent that was available then.
This would also be consistent with the employees feeling a significant amount of loyalty toward Ev, and several wanting to quit when he was ousted.
I don't know enough about business, but I feel rewarding people is never a bad idea, as long as the talent fits. That being said someone outside can be a fresh eye, but again, doesn't mean they won't become issue. I actually find Google's Eric Schmidt being a really successful outsider (but he joined so early), or Yahoo's CEO being the next prime example in this external talent debate. I mean why work for a company if you won't be prompted to take on the next important role? How many years do you want to stuck at being a director, rather than a VP, or a SVP?
This would also be consistent with the employees feeling a significant amount of loyalty toward Ev, and several wanting to quit when he was ousted.