The High Cost of Poor Succession Planning
The following contribution corresponds to the Harvard Business Review portal and the authors are Gregory Nagel and Carrie Green
A Better Way to Find Your Next CEO
Many large companies don’t pay enough attention to their leadership pipelines and succession practices. That leads to excessive turnover at the top and destroys a significant amount of value—about $1 trillion a year among the S&P 1500 alone, the authors say…more
In August 2013, Steve Ballmer abruptly announced that he would step down as Microsoft’s chief executive as soon as his replacement could be found. Thus began one of the most consequential CEO searches of the past decade—and a case study in the dos and don’ts of top management succession.
At the time, Microsoft was the third-most profitable company in the United States and the fourth most valuable.
Yet this respected global tech giant did not seem to have a plan to replace Ballmer, even though, according to most informed observers, it had been underperforming for years (critics cite its slow transition into mobile, social media, and video, along with ill-fated acquisitions and product reboots).
While some high-profile executives, such as Windows chief Steven Sinofsky and Xbox chief Don Mattrick, had jumped ship during his tenure (another sign of trouble), with a workforce of 100,000, Microsoft could surely have identified other promising candidates in senior management positions, not to mention outsiders, who would be willing to take Ballmer’s place.
Instead, Microsoft appeared to start from scratch, focusing largely on outside candidates.
According to the director who chaired the search committee, the board cast a wide net across a range of industries and skill sets, identifying more than 100 candidates, speaking to several dozen, and then focusing intently on about 20.
Among them was Steve Mollenkopf, Qualcomm’s chief operating officer, who fell out of contention when he was promoted to that company’s top job.
Alan Mulally, fresh from a turnaround at Ford and the front-runner, took his name off the list in January, at which point the press described Microsoft’s board as turning to Plan B.
Finally, in February, six months after Ballmer declared himself a lame duck, Microsoft announced that a member of his team, Satya Nadella, would become the third CEO in its history.
We now know that despite that clumsy succession process, Nadella was an excellent choice
He moved Microsoft away from fiefdoms and a “know-it-all” culture and toward a more open and collaborative “learn-it-all” culture; he built the cloud computing business; he made Office available on every smartphone; and he executed dozens of profitable acquisitions, including the purchase of LinkedIn.
In his first nine months as CEO, Microsoft’s stock rose 30%, increasing its market value by $90 billion. As we write this, seven years into his tenure, it is the second most valuable company in the world.
But what if Microsoft had not promoted Nadella? What if its rushed, extremely broad, externally focused search had resulted in the hiring of an outsider? What if Mulally, who had no experience in the technology sector, had been appointed?
Why hadn’t the board already been grooming Nadella?
Why hadn’t the board already been grooming Nadella (a 21-year veteran of the company with clear leadership competency, cultural fit, and experience in emerging areas of technology) or any of his similarly qualified peers?
While Microsoft made the right decision in the end, its lack of planning could have led to a costly disaster.
Like Microsoft, many large companies fail to pay adequate attention to their leadership pipelines and succession processes. And most of them aren’t as lucky as Microsoft.
In our nine decades of combined experience in executive search and talent development (Claudio), professional investing (Carrie), and financial and management research (Gregory), we’ve seen flawed succession practices lead to excessive turnover of senior executives and, in the end, significant value destruction for companies and investment portfolios.
In our recent research we have attempted to quantify those costs
According to our analysis, the amount of market value lost due to poorly managed CEO and senior executive transitions in the S&P 1500 is close to $1 trillion a year.
We estimate that better succession planning could help the US large-cap stock market add a full point to the 4% to 5% annual gains that Wall Street projects for it.
In other words, company valuations and returns to investors would be 20% to 25% higher.
In this article, we will examine those findings and then make recommendations on how to significantly improve corporate performance and returns to investors through better practices for preparing and selecting CEOs. Of course, these lessons can also be applied to succession planning for other key senior management roles.
Quantifying the Problem
In our view, large companies’ excessive tendency to hire outside leaders is one of the biggest problems with succession practices.
This propensity generates three main types of costs: poor performance in companies that hire unfit outside CEOs, loss of intellectual capital in the top positions of the organizations that executives leave behind, and, for companies that promote insiders, lower performance from poorly prepared successors.
A landmark study that Rakesh Khurana and Nitin Nohria of Harvard Business School
conducted years ago sheds light on the first type of cost. Khurana and Nohria examined the impact that different types of CEO succession had on the operating returns of 200 organizations over a 15-year period.
They compared four scenarios:
(1) a promoted insider at a reasonably well-performing company; (2) an internal employee promoted at a poorly performing company
(3) an external employee hired at a reasonably well performing company
(4) an external employee hired at a poorly performing company.
They found that, on average, internal employees did not significantly change their company’s performance.
That makes sense: similar people working in similar ways at the same company will produce similar results.
In the case of external candidates, the change was much more radical. In the rare cases where a company was not doing very well, the externals added a lot of value, on average.
But in companies that were doing reasonably well, the externals destroyed enormous value.
This suggested that companies looking for a new CEO should hire external candidates only in rare cases, when a cultural shift or radical change is needed. Balint Alovits
Other research has confirmed that external hiring often fails to deliver on its promises
For example, Matthew Bidwell of the Wharton School of Business found that while external hires tend to have better experience and training than internal hires, they are paid more, perform worse, and have higher exit rates
Other studies back this up: one by Cláudia Custódio, Miguel Ferreira, and Pedro Matos showed that externally hired CEOs were paid 15% more than internally hired ones, on average
Another study by Sam Allgood and Kathleen Farrell
found that CEOs who come from outside are 84% more likely to be replaced than those who come from within within the first three years, usually for poor performance.
Another recent study found that companies often choose outsiders because they have already been CEOs at other companies, indicating that companies value prior experience in the position over the potential of insiders to excel.
But that experience rarely guarantees success: When researchers looked at S&P 500 CEOs who had run more than one company, they found that 70% had delivered better performance the first time around.
Despite those drawbacks, S&P 1500 companies hired their CEOs from outside 26% of the time between 2014 and 2018, according to ExecuComp data — perhaps because, as Wharton’s Peter Cappelli has found, companies have an irrational bias toward interesting, flawless outside hires about which they know less.
We wanted to investigate how outside CEOs performed relative to what insiders in the same positions might have done.
Without the ability to go back in time and run through different scenarios, it would seem impossible to do so. But we believe that with statistics we can predict what would have happened with different CEO hires.
We used a technique known as structural self-selection modeling (SSSM), derived directly from the research of Nobel Prize winner James Heckman.
It’s similar to the multiple regression model that companies frequently employ in forecasting and scenario planning exercises.
We first identified 80 independent variables, including firm characteristics (such as size and capital expenditures), industry, risk, board structure, and short- and long-term performance before and after a CEO change.
The performance metric we used was cash flow return on assets, which unlike operating return on assets takes into account the reorganization and restructuring costs that are common after an outside CEO comes in.
We then looked at each case in which an outside CEO was hired to run a U.S. public company over a 17-year period
and calculated the change in cash flow return on assets over his or her tenure. We plugged the 80 independent variables for each of those companies into the SSSM to create a “counterfactual”: what would have been the expected change in cash flow return on assets if the company had promoted an insider.
We found that only 39% of external hires would have performed better than a theoretical internal hire.
Large companies’ excessive tendency to hire outside leaders is one of the biggest problems with succession practices
Of course, no one knows in advance how any appointed executive will perform, but boards must base momentous and risky hiring decisions on their best estimate of future results.
Our analysis shows that in only 7.2% of cases will an externally hired CEO have a 60% chance of outperforming an insider, and in just 2.8% of cases will he or she have a 90% chance of outperforming an insider.
As dramatic as these numbers are, they only tell part of the story. A key effect of outside choices for CEOs and other senior positions is the loss of intellectual capital in the top executives of the companies from which those executives were hired.
And because, on average, executives perform worse at the company they join, the negative impact on the entire market is even greater.
We can calculate the effect that the loss of intellectual capital has on market valuations by analyzing the impact of sudden CEO departures and using the economic model provided by Hanno Lustig, Chad Syverson, and Stijn Van Nieuwerburgh to track how much intellectual capital a departing manager can transfer to his or her next employer.
Reduced intellectual capital and falling profitability
Our analysis shows that the decline in intellectual capital at companies where new executives previously worked leads to a 0.7 percentage point reduction in total shareholder returns for the S&P 1500, or $255 billion, each year.
If we add in the poor performance of companies that hire outside CEOs, total shareholder returns fall by about another half percentage point, costing investors an additional $182 billion.
The final impact, when companies do promote internal CEOs but fail to adequately prepare them to take over, costs an additional 0.3 percentage points, bringing the total loss across the S&P 1500 portfolio to $546 billion.
To calculate the third cost, we draw on a study of 2,900 companies by Northeastern University’s Olubunmi Faleye, which found that the return on assets of companies with poorly prepared internal CEO successors is significantly lower than that of companies that adequately prepared them.
A simple extrapolation of these findings to global stock markets, which together are worth about $58 trillion at the time of this writing, implies that total annual costs to global shareholders would amount to $870 billion.
This global estimate is likely conservative, given that governance, succession, and talent practices are typically significantly better in the United States than in most other countries.
We are currently expanding our analysis to other major stock markets to try to confirm this.
Another negative consequence of poor succession planning and excessive outsourcing is rising CEO pay as companies compete for the same top executives.
Financier Worldwide reported that across the top 350 US companies, the average CEO pay had risen to $17 million in 2018, or about 278 times the pay of a typical employee.
From 1978 to 2018, CEO pay had risen by more than 1,000%, while average worker pay had risen by only 12%.
While these numbers are alarming, our analysis shows that skyrocketing CEO pay actually plays only a small role in value destruction.
The main costs of poorly thought-out successions remain poor performance by outside CEOs, the loss of intellectual capital by senior executives in companies that CEOs and other senior executives leave behind, and internally promoted executives who are not well prepared.
A final note: We intentionally focused this analysis on large companies because we believe that is where the problem of poor succession at the top is most acute.
Small companies often lack a deep talent pool, so they can best benefit from hiring outside CEOs.
Implementing Solutions
Why are some of the world’s largest and most powerful organizations making such misguided CEO appointments?
For five main reasons:
lack of attention to succession, poor leadership development, poor board composition, lazy hiring practices, and conflicted search firms.
Here are some recommendations for fixing those problems.
Plan for succession long before you think you need to do so. According to PwC’s latest Strategy& CEO Success study, CEO turnover at the world’s largest 2,500 companies reached nearly 18% in 2018, the highest rate ever recorded by PwC. A disturbing 20% of those CEOs who left were forced out, and for the first time in the study’s history, more CEOs were fired for ethical misdeeds than for financial performance or conflicts with their boards.
Looking ahead, we suspect that unplanned CEO turnover will continue to rise due to increased attention to moral issues (such as sexual harassment) and industry and market volatility.
Despite this trend, boards continue to be caught off guard because they have not spent enough time developing talent and mapping out potential succession lines.
Some believe that it is enough to have an informal “if tomorrow the CEO gets hit by a bus” plan, which selects a replacement but does not groom or vet that person or weigh alternatives. Not so.
Others delegate succession planning to the CEO, which is an equally unacceptable abnegation of duty.
For example, we know of a major company, valued at hundreds of billions of dollars, with a CEO in his late sixties who has been unwilling to adequately develop any potential replacements.
Unfortunately, because the company’s recent results and stock market performance have been good, board members are afraid to confront him.
Balint Alovits’ Time Machine project explores the Bauhaus and art deco spiral staircases of Budapest, using perspective and repetition of shapes to evoke a sense of infinity. Balint Alovits
Succession planning should begin the moment a new CEO is appointed
Take Ajay Banga, former CEO and current chairman of Mastercard, for example: He began discussing when he might hand over the CEO role to a successor even while he himself was in the process of interviewing for the position.
The process should remain robust, with directors constantly monitoring and, if necessary, adjusting the process. If there is not yet a potential successor among the CEO’s direct reports, the board should look to the next level and consider promotion and development opportunities that will help executives there progress.
If that level is empty, directors can promote or hire high-potential individuals to join it or senior management. While hiring from outside is often not ideal, it is much less risky to do so at a lower level than at the top.
Identify and deliberately develop your rising stars
By now, most directors know the attributes and skills needed in top executives.
At the leadership consulting firm Egon Zehnder, where one of us (Claudio) worked for three decades, the checklist used for CEO searches includes intelligence and values.
The firm also assesses candidates for strategic orientation, market awareness, focus on results and customer impact, and their ability to collaborate with and influence others, organizational development, team leadership, and change management.
Meaningful succession planning requires finding rising managers who have the right levels of all of those capabilities or, more likely, the potential to develop them.
Four critical traits—curiosity, insight, commitment, and determination—indicate potential, and with the right training and support, people who demonstrate them can be groomed for senior positions. (For more on this topic, see “Turning Potential into Success: The Missing Link in Leadership Development,” HBR, November–December 2017.)
An important area of development for any CEO is emotional intelligence
which encompasses flexibility, adaptability, self-control and relationship management. You might think that such soft skills would be harder to learn than hard ones such as numeracy or coding, but as Richard Boyatzis of the Weatherhead School of Management has conclusively shown, people can acquire these crucial leadership competencies even as adults.
Another way boards can help potential successors prepare is to insist that they are given challenging rotations and demanding assignments, as was common at General Electric in its glory days and is practised with great success at Unilever and McKinsey today. When you expose your highest potentials to new geographies, businesses, situations and functions, you can become a leadership factory.
Appoint the most promising executives to the board, or give them more access to it
In the United States, in part because of regulatory mandates following executive misconduct at Enron, Tyco and other companies, most large company boards have become fully independent, with the CEO the only employee director. Faleye found that the share of American boards set up this way soared from about one-third in 1998 to more than two-thirds in 2011.
Our analysis shows that the percentage of fully independent boards has continued to rise, reaching 76% in 2018.
While there are clear benefits to getting oversight and advice from outside experts, we believe that independent boards are less equipped to manage CEO succession.
With so little exposure to up-and-coming insiders but extensive knowledge of potential external hires from their own organizations and other board experience, it is understandable that directors are more likely to favor external CEO candidates or be unduly influenced by individual opinions. As one veteran director recently told us, “It’s scary to see how little knowledge boards have about top internal executives these days; “A lot of the opinions are painted either too positively or too negatively by the sitting CEO.”
We believe boards should make room for one to three executives who are potential successors to the CEO
Not only does this allow directors to see potential candidates in action, it better prepares those individuals to take on the top job.
When Faleye compared the performance of internally promoted CEOs who had prior director experience to that of internal executives who lacked it, he saw that during their first two years, CEOs with board experience had an average return on assets that was 12.5 percentage points higher.
Interestingly, this huge difference disappeared during the third year, suggesting that while both types of executives had similar levels of competence and potential, exposure to board-level strategic discussions as well as established relationships with directors dramatically flattened the gaps. learning curves.
Indra Nooyi, for example, joined PepsiCo’s board when she was the company’s chief financial officer
five years before becoming CEO. By observing her firsthand, the board gained confidence in her competence and potential and, following her appointment as CEO, became more open to her plans to radically transform the company by expanding its portfolio beyond sugary drinks and shifting it toward greater social responsibility.
During Nooyi’s tenure as CEO, PepsiCo’s net profit increased by 122%.
Boards should make room for one to three executives who are potential successors to the current CEO. Board experience helps prepare those individuals to take on the top job.
If you already have too many directors or too many promising potential CEO successors in your ranks
An alternative (though suboptimal) approach is to ask your rising stars to frequently attend and present at board meetings.
This will enhance their exposure, contributions, and development. Before the pandemic, good boards organized group trips or off-site meetings where directors and senior executives—and even their spouses—could connect professionally and personally.
As boards get back into the swing of things post-COVID, we expect to see that in-person social interaction resume. For further development, you can also encourage some of your most likely successors to selectively join other companies’ boards.
Scrutinize Internal and External Candidates
Best practice is to carefully outline your ideal CEO profile and then search inside and out for the person who best fits that description.
While we believe all companies should first master the art of spotting internal talent and creating succession plans based on their current headcount, we also see value in external searches for benchmarking and comprehensiveness. (And so do companies like Mastercard, PepsiCo, P&G, and American Express.)
Research from the Center for Creative Leadership has consistently shown
that when companies consider broad groups of internal and external people, executive appointments are more successful. Whether you’re looking for a house or your next top executive, benchmarking produces better decisions.
Make sure you conduct thorough assessments of all candidates, even internal ones who are well known to the board. The focus should not be on who has performed the best so far, but on who is ready to meet the future challenges of the CEO role and has the potential to continue to adapt in a volatile, uncertain, chaotic and ambiguous world.
Judge everyone on their job specifications, question candidates in well-structured interviews and conduct thorough reference checks. This is the only way to avoid appointing the wrong people to the job.
If you partner with search consultants, avoid common perverse incentives
Executive search firms can often add tremendous value to succession efforts. Consultants with the right training and experience can identify the competencies each senior position requires, get more mileage out of interviews and reference checks, and distinguish potentially top performers from the rest. These consultants also tend to have trusting relationships with candidates, sources, and references.
However, the search profession as a whole is probably still as harmful as it is beneficial, due to two blatantly perverse incentives: the contingency agreement and the percentage fee.
Most search consultants are compensated when they hire a person, regardless of that person’s suitability for the job or where they come from.
They don’t make money on internal hires, which they don’t need to find or hire. Traditionally, search consultants are paid one-third of the new executive’s annual cash compensation (salary plus bonuses). As a result, whether consciously or unconsciously, many undersell third-party providers and reject internal alternatives.
The solution is to change the percentage fee to a pre-set, flat fee that is based on the importance of the position and the complexity of the search and to replace the contingency fee with a retainer so that the consultant is paid the same no matter who is appointed. (Of course, the retainer fee makes financial sense only if you plan to use the consultant for enough search and consulting work to justify the cost.)
Even if you get those two things right, you should still use search consultants only in special situations—for example, if your internal candidates aren’t a good fit, you can’t identify or access appropriate external candidates on your own, or your company is entering a new business, region, or period of strategic change. Next, approach the selection of your consultant as you would any other personnel decision: ask for recommendations, consider several firms, and check references.
Once you’ve developed a shortlist, meet the recruiters in person to get a sense of their relevant experience as well as their level of professionalism, candor, and concern.
Companies and institutions need to do a better job of getting CEO succession right—their organizations, their industries, and their market returns depend on it.
We hope this article helps senior executives, directors, and investors recognize the magnitude of the problem and act accordingly. Microsoft shouldn’t have needed a long, public search to come to the conclusion that Nadella was the right leader to get the company back on track after Ballmer’s years of struggle.
It should have already had him (and other potential successors) waiting in the wings. How many rising stars like Nadella do you have at your company? And what can you do tomorrow to put them on track to become your next (and hopefully best) CEO?
CEO turnover hits record high
The following contribution is from Théo Gaultier who is the director of Korn Ferry South Africa
CEO turnover hit a record 17.5% in 2018, but one group of executives is holding its own.
According to the 2018 CEO Success Study published by PwC, while the average tenure of a CEO has been five years, 19% of all CEOs remain in the role for 10 years or more, consistently, over the period the study was conducted.
The study has analysed CEO succession at the world’s 2,500 largest public companies over the past 19 years.
Despite disruption, intense competition and eager investors, the average tenure within the group is 14 years, and these longer-serving CEOs perform better and are less likely to be forced out than shorter-serving CEOs.
Jonathan Cawood, Head of Strategy at PwC Africa, says: “CEO succession is one of the most important responsibilities of the board. The CEO is responsible for setting the company’s strategy, driving its execution and “setting the tone from the top.”
“Many companies are not fully prepared for a CEO to leave, although succession planning is one of their key responsibilities,” he adds.
“Too often, boards are caught off guard by a CEO stepping down, whether through retirement, moving on to other opportunities or leaving under pressure. Transitions create uncertainty.
“When the board is looking for a suitable replacement, the succession process will most likely disrupt operations, unnerve employees and shareholders and may even fuel negative publicity.”
Anelisa Keke, Senior Director in PwC’s People & Organisation practice, adds:
“Today more than ever, CEO succession planning is a growing concern – CEOs who stay in their role until retirement are becoming the exception rather than the rule. Well-developed and executed succession plans can mitigate the risk of a leadership vacuum when a CEO retires or steps down, which can result in a loss of investor confidence.
“Good succession planning will also need to be supported by appropriate remuneration and incentive packages. According to our recent report CEOs: Remuneration Practices and Trends, it is critical that interactions between the remuneration committee and the nominating committee are properly coordinated when determining CEO succession planning and how this plan can influence CEO remuneration.”
2018 also saw an increase in the proportion of CEOs forced out of their positions due to ethical lapses
In fact, more CEOs (39%) were forced out of their positions due to ethical lapses rather than financial performance or board issues, a first in the study’s history. This figure rose by 50% compared to 26% in 2017.
The study defines terminations for ethical lapses as the removal of the CEO as a result of a scandal or misconduct by the CEO or other employees
Examples include fraud, bribery, insider trading, inflated resumes, and environmental disasters. The increase in such terminations reflects several social and governance trends.
These include, but are not limited to, increased intervention by regulatory and enforcement authorities, new pressures for CEO accountability, as well as a growing propensity for boards to take a zero-tolerance stance towards executive misconduct.
Gerald Seegers, People and Organisation Director at PwC Africa, adds: “Boards, institutional investors, governments, the media and other stakeholders are holding CEOs to a much higher level of accountability for corporate fraud and ethical misconduct than in the past. Our research shows that companies continue to improve both their CEO selection and replacement processes and their leadership governance practices.”
CEO turnover at the world’s largest 2,500 companies hit an all-time high of 17.5% in 2018, three percentage points higher than the 14.5% in 2017 and above what has been the norm for the past decade.
It is worth noting that the longer the longest-serving CEO is in office, the worse the CEO who replaces him/her performs
Over the past two years, there has been a slight uptick in the share of CEOs with international work experience. The share of incoming CEOs with an MBA has also risen steadily over the past seven years (2012: 30%; 2018: 33%).
Among industries, turnover was highest in communication services companies (24.5%), followed by materials (22.3%) and energy (19.7%). The healthcare sector recorded the lowest CEO turnover rate in 2018, at 11.6%.
Tenure of all CEOs in media globally has remained stable at five years over the past decade, and the median age of 53 years of incoming CEOs has also remained stable over the past decade.
The share of incoming female CEOs was 4.9%, down slightly from the all-time high of 6% in 2017
However, the trend has been upward since the low point of 1% in 2008.
Unlike in 2017, when the all-time high was driven by spikes of 9.3% in the number of incoming CEOs in the US and Canada, the highest percentages in 2018 originated in Brazil, Russia, India and China and other emerging countries.
The utilities industry had the highest share of female CEOs at 9.5%, followed by communication services and financial services at 7.5% and 7.4% respectively.
Poor succession planning leads to high CEO turnover
The following contribution is from the Hunt Scanlon (Leadership Intelligence) portal and is authored by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Editor-in-Chief; Stephen Sawicki, Editor-in-Chief; and Andrew W. Mitchell, Editor-in-Chief – Hunt Scanlon Media
A lack of succession planning can be costly and leave companies with few options when faced with a transition at the top.
A report from Russell Reynolds Associates provides new insights into CEO turnover and outlines six phases of a well-conceived transition process. Let’s dive into the latest findings.
CEO transitions have always been challenging, but never more so than in today’s high-stakes business environment.
To get a clearer picture of the demands and risk posed by CEO successions and transitions, Russell Reynolds Associates reviewed S&P 500 member companies (through August) and analyzed their CEO tenure and turnover rates between January 1, 2003, and December 31, 2015.
At these 500 companies, there were 688 CEO transitions over the 12 years, with 40 percent of organizations experiencing two or more CEO transitions.
While the average outgoing S&P 500 CEO had a tenure of 5.9 years over that period, a surprising number left quickly.
The report found that 3.1 percent of new CEOs left in less than three years
And more than half left in less than two. Looking only at outside CEO appointments, the numbers rose to a 17.2 percent exit rate over three years and 11 percent over two years — a remarkable failure rate.
“These are not inexperienced leaders or unsophisticated companies,” said Jack O’Kelley, author of the report and global leader of Russell Reynolds’ board effectiveness and consulting practice. “These appointments were the product of succession and onboarding processes used by some of the largest and most successful companies in the world. Yet nearly one in seven CEOs was not present on the third anniversary of their appointment.”
Why do they leave?
The root causes of the departures were varied. Russell Reynolds analyzed each transition and its circumstances to determine whether it was planned or not.
In its research, the search firm considered a variety of disparate factors. A small number were related to a change in the CEO’s personal circumstances.
Some departures were the result of mergers and acquisitions. And some were for larger CEO opportunities — collectively, about 15 percent. A large number (about 85 percent) appeared to be because the new CEO was unsuccessful or ineffective and removed by the board.
Sometimes these decisions are presented to the public as a decision to step down, but some circumstances and company performance would indicate otherwise, the report said.
“We don’t see boards putting enough emphasis on CEO transition planning, which, if done well, should help reduce the failure rate of CEO appointments, particularly external appointments,” Mr. O’Kelley said.
“Boards should reconsider their approach to long-term succession planning and include a more deliberate process around transitions to reduce unexpected CEO departures and potential value destruction.”
A different approach
Any CEO succession and departure introduces inherent risks for the company and its shareholders. “Combined with an ill-considered CEO transition, it increases risks for shareholders,” Mr. O’Kelley said.
“A thoughtful CEO transition presents an opportunity for the new CEO to quickly get up to speed and focus on issues that will increase shareholder value. Thoughtful succession and transition plans can increase the new CEO’s understanding of the company and its strengths and weaknesses, reducing the chances of failure.”
Jack O’Kelley is a senior member of Russell Reynolds Associates’ CEO and managing director advisory group. His areas of expertise include CEO effectiveness and governance, CEO succession planning, and advocacy for activism (CEO performance and governance).
He has led numerous CEO consulting engagements, helping CEOs improve their overall effectiveness, performance and culture, as well as review governance and board composition in relation to proxy fight advocacy.
A new CEO must quickly develop relationships with numerous key constituencies in an environment defined by uncertainty and anxiety.
“This is true even when the CEO is an internal successor,” Mr. O’Kelley said. “The strategic intent of the company may remain largely unchanged, but style and expectations change from leader to leader. When done well, CEO transition planning engages the organization’s stakeholders and proactively alleviates potential areas of stress, keeping the senior team focused on the business and creating value.”
Long-Term CEO Succession Planning
“Our experience has shown, time and again, the importance of boards preparing CEO and executive director succession plans thoughtfully, systematically, and well in advance of a specific CEO transition,” said O’Kelley.
“Over the past decade, we have seen an increased emphasis by boards on thoughtful and analytical CEO succession planning, and over the past five years, outside advisors have developed and refined predictive assessment tools to help ensure better candidate selection. These efforts should yield improved outcomes around CEO candidate selection in the years ahead.”
Russell Reynolds report says proper CEO succession planning
For a leadership change begins four to five years before it is anticipated.
This effort starts with regular board involvement in long-term CEO succession planning, starting early in the CEO’s tenure.
The board should ask how the current CEO and HR director are identifying and developing the best internal candidates, as well as the strength of the overall team.
As part of their fiduciary obligation, boards should compare their internal candidates to external candidates to better understand the internal candidates’ strengths and weaknesses, the search firm said.
“Eventually, the time will come to begin the formal transition process. Assuming the evaluation and selection process is orderly, boards can guide and support the new CEO as he or she prepares to take on the new role,” O’Kelley said.
“Whether they are promoted from within or hired from outside, incoming CEOs will benefit greatly from an orderly and thoughtful plan that the board encourages and reviews.”
Six Phases
The search firm said well-thought-out transition processes are typically comprised of six phases, but should be refined to fit specific circumstances.
Phase 1: Planning the transition and thinking through the details
Working with the incoming and outgoing CEOs, a process owner (e.g., the general counsel, chief human resources officer, or a trusted outside advisor) should develop a draft transition plan that reflects priority areas, according to the Russell Reynolds report.
The plan should include a clearly defined sequence of meetings, decisions, and communications to make the transition as smooth and transparent as possible.
For outside successors, it is important, whenever possible, for the outgoing CEO and the new leader to have a roadmap for meetings and knowledge transfer between them — a process that requires planning given that the new leader is not yet part of the organization.
Why Succession Planning Matters
For companies, failing to prepare for the future can be costly at best and disastrous at worst.
Yet succession planning remains one of the top challenges facing companies today.
A recent study found that more than half of companies surveyed do not have a strong candidate prepared in the event of a CEO transition.
For internal successors, creating the detailed transition plan is a good opportunity for the new CEO to begin thinking about changes to the way the company is organized and run, said Russell Reynolds.
For an external successor, it is a good opportunity to make early observations about the organization’s executive talent.
Key parties (CEOs and board leaders) need to agree on an orderly transfer of roles and responsibilities, as well as on resolving the numerous issues that will inevitably arise during the transition. If the outgoing CEO is going to stay on as executive chairman, that role should be clearly defined (and limited) to ensure that the board and everyone in the company truly views the new CEO as the “full CEO.”
In these circumstances, it is helpful for both leaders to agree on a mutually defined set of roles and responsibilities, which are reviewed and approved by the board.
Phase 2: Document and Communicate the Plan
Next, the transition process and decisions need to be written down and communicated throughout the organization, according to the Russell Reynolds report.
It is an iterative process. During transitions, leaders who are a level or two below the CEO are often the ones who feel the most anxiety.
The potential for confusion most often occurs during lengthy transitions or when the former CEO remains as executive chairman without a clearly defined role that is completely separate from that of the new CEO.
Clear communication of the process, roles and responsibilities will demonstrate stability and consideration to senior leaders and other stakeholders, the report said.
Senior leaders should be involved as appropriate while the plan is being finalized to ensure clarity and buy-in from senior executives.
Communicating the transition plan should be as transparent as possible and provide a well-defined management framework to reduce uncertainty.
Phase 3: Building relationships with the board
Institutional investors have raised their expectations of boards, and directors have responded. Boards are more active on behalf of shareholders, and the relationship between the board and CEO is more dynamic and engaged than ever.
To be successful, any new CEO must understand and engage with the board as a whole, as well as build or maintain strong relationships with each individual board member, said Russell Reynolds.
If the new CEO is an internal candidate, beginning 18 to 24 months before the transition, the individual should have increasing visibility at board meetings, as well as an increase in the scope and nature of their involvement.
After the announcement and closer to the transition, there should be an agreed-upon timeline for the new CEO to assume board responsibilities. In addition, there should be opportunities for the outgoing CEO (and the board chair) to train the incoming CEO on boardroom norms and expectations.
It is also important for the new CEO to build strong bonds with each individual director, the report said.
The new CEO should meet with each director individually to understand their views and develop relationships with them as individuals.
This is helpful even if the new CEO already has relationships with many members, as his or her role and the expectations associated with it will change.
Board members have an equal responsibility to be candid with the new CEO and to accept a new style and some degree of related change in boardroom dynamics.
For an external candidate, such a long preparation period is not possible
It is critical that the outgoing CEO or lead director begin working with the new CEO as soon as the announcement is made, Russell Reynolds said.
Whether the incoming CEO is an external or internal choice, the outgoing CEO should act as a coach for the new leader, providing guidance on how to build a productive relationship with the board.
Phase 4: Sharing knowledge and cultural norms
The next phase of a transition requires the outgoing CEO to share knowledge with the new CEO about important organizational relationships and the cultural attributes of the institution.
This is especially critical when the CEO is selected from the outside to ensure that he or she avoids early mistakes due to lack of cultural familiarity. Knowledge transfer is equally important for an internal successor, who will be working with new stakeholders.
The CEO’s important role in succession planning
The CEO’s role is straightforward: drive management succession at senior levels, including early identification of any internal candidates for the CEO position, ensuring that the organization is developing succession-ready executives in all senior positions.
To be successful, a transition plan must include developing a deep understanding of the company’s goals, strategy, and the formal and informal elements of its culture, said Russell Reynolds.
So the outgoing and incoming CEOs should have a series of conversations focused on the business and competitive environment, strategy, the organization, its culture and its people, particularly executive talent.
Any new CEO must learn to appreciate the expectations of board members as well as the board’s operating style. An outside leader needs to know the history of the company’s culture and «the way things are done around here.»
Phase 5: Learning the goals and concerns of key stakeholders
At the right time, the new CEO should engage with the company’s broader leadership group and key stakeholders and understand their perspectives.
In addition to the board, the new CEO should meet with company leaders and members of the investor community to develop a deep understanding of company issues and stakeholder concerns, according to the search firm.
Some organizations have hired an outside party to conduct the interviews, synthesize the results and prepare the new leader for meetings with stakeholders.
Careful planning should be devoted to building relationships with important stakeholders, such as institutional investors and regulators.
Most internally promoted successors have not had enough substantive interaction with the investor community.
Ideally, there should be increased visibility about a year before the expected transition. The current CEO can play an important role by personally introducing the new leader to important constituents and helping them create, or redefine, their stature in the organization.
Phase 6: Assessing the Transition
The final element of a successful transition involves assessing its progress and identifying any potential issues so they can be quickly resolved.
“An effective assessment method should candidly and thoroughly evaluate every aspect of the transition,” the report states. “It should also provide a roadmap for addressing any concerns that arise, and all parties should be committed to resolving any disagreements.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Stephen Sawicki, Executive Editor; and Andrew W. Mitchell, Executive Editor – Hunt Scanlon Media
Forced CEO turnover is higher at companies with weak succession plans, survey finds
The following contribution is from the Chief Executive portal and is written by Katie Kuehner-Hebert who has over two decades of experience writing on corporate, financial and industry-specific topics.
Companies that do not plan for CEO succession face a higher chance of forced CEO turnover, resulting in a $1.8 billion loss in shareholder value, according to Strategy&.
Looking at companies within the top 2,500 that had CEO turnovers on or before January 1, 2014, they found that the average total shareholder return for “all” turnovers fell to -3.5% in the year after. However, for forced turnovers, the average return fell to -13% in the year before the CEO change and -0.6% in the year after, meaning those companies lost up to $1.8 billion more than those with planned turnovers.
“High-performing companies with planned successions had stronger leadership pipelines and were more likely to hire their CEO from within than other companies.”
Companies can improve their succession process if they have a plan in place and always look forward to the needs of the company, “not back to candidates’ backgrounds,” the authors wrote.
Such plans should revolve around maintaining a strong internal pipeline
Since high-performing companies with planned successions generally had stronger leadership pipelines and were more likely to hire their CEO from within the company than other companies, the report found.
Lower-performing companies, by contrast, did not appear to have as strong a pipeline to draw on
Over the past decade, 25% of their new CEOs had been outsiders and an additional 15% were interim leaders, compared with 21% and 10% at higher-performing companies, respectively.
“Given the value implications, this is clearly a business issue that should be ‘owned’ by the senior team rather than relegated to HR,” one author wrote.
He cited several steps companies should take early on, including strong board involvement in the succession planning process and talent development programs that reward high-performing employees.
In a video accompanying the report, another author says boards should “think about two CEOs up front, not just one.”
By the time the current leader prepares to retire, the options have already narrowed considerably, and “if that pool of options is too small, there’s nothing to be done” — companies might have to look outside for less-qualified candidates who aren’t as familiar with the organization’s unique challenges.
Companies should also hire people with the skills they’ll need in the future as they grow, he says.
Talent development programs, they say, should include concrete measures to ensure that the 50 most talented employees get “the right kind of experience from the start,” such as giving them responsibility for entire business units and assigning them to international roles.
Companies should ensure that “the best leaders are faced with some really big challenges that develop them and also demonstrate that they have the skills to deal with some of the toughest challenges a company faces,” he says.
CEO turnover hits all-time high; successors following longest-serving CEOs struggle, says PwC’s global Strategy& study
The following contribution corresponds to a Press Release from PriceWaterhouseCoopers
CEO turnover hits all-time high
CEO turnover hit an all-time high of 17 percent in turbulent 2018, but there is one group of executives holding their own, according to the CEO Success 2018 study released today by Strategy&, PwC’s strategy consulting firm.
The study, which analyzed CEO successions at the world’s 2,500 largest public companies over the past 19 years, reports that while the median CEO tenure has been five years, 19 percent of all CEOs remain in the role for 10 years or more, consistently, over the time period analyzed.
Despite disruption, intense competition, and eager investors, the median tenure within the group is 14 years
And these longer-tenured CEOs also perform better and are less likely to be forced out than shorter-tenured CEOs.
By region, North American CEOs have a significant margin in the likelihood of becoming long-term CEOs (30%), followed by Western Europe (19%), Japan and the BRI countries (Brazil, Russia, and India) (9%), and China (7%).
2018 also showed an increase in the share of CEOs who were forced out of their positions for ethical lapses. In fact, more CEOs (39%) were forced out of their positions for ethical lapses rather than financial performance or board issues, a first in the history of the study. This figure is up 50% compared to 26% in 2017.
A tough road ahead
Successors of long-serving CEOs are not faring as well, as they are likely to have shorter tenures, perform worse, and are forced out more often than the CEOs they replaced.
Almost half of successor CEOs fell one performance quartile or more compared to their predecessors. 69 percent of successors who replaced a long-serving CEO in the top performance quartile ended up in the bottom two performance quartiles.
“Succeeding long-serving CEOs is clearly a big challenge,” said Per-Ola Karlsson, Partner and Leader of Strategy&’s Organization, Change and Leadership Practice in the Middle East. “Their successors typically generate lower returns to shareholders and are notably more likely to be fired than the legend they succeeded, as well as their peers.”
CEO turnover in 2018
CEO turnover at the world’s largest 2,500 companies soared to a record 17.5 percent in 2018, up 3 percentage points from the 14.5 percent rate in 2017 and above what has been the norm over the past decade.
CEO turnover rose sharply in all regions in 2018 except China, and included a large increase in Western Europe.
Staff turnover was highest in other “mature” economies (such as Australia, Chile and Poland), at 21.9 percent, and about the same in Brazil, Russia and India (21.6 percent). The next highest turnover figures were in Western Europe (19.8 percent) and the lowest in North America (14.7 percent). Among sectors, staff turnover was highest in communication services companies (24.5 percent), followed by materials (22.3 percent) and energy (19.7 percent). The healthcare sector had the lowest CEO turnover rate in 2018, at 11.6 percent.
Women at the top
The share of incoming female CEOs was 4.9 percent, down slightly from the all-time high of 6.0 percent in 2017. However, the trend has been upward since the low point of 1.0 percent in 2008.
Unlike in 2017, when the all-time high was driven by a 9.3 percent increase in the number of incoming CEOs in the U.S. and Canada, the highest percentages in 2018 originated in Brazil, Russia, India and China and other emerging countries.
The utilities industry had the highest proportion of female CEOs, at 9.5 percent, followed by communication services and financial services, at 7.5 and 7.4 percent respectively.
About the 2018 CEO Success Study
Over the past 19 years, Strategy& has been continuously tracking data on CEO successions.
The 2018 study analyzed CEO successions at the world’s 2,500 largest public companies (by market capitalization) over the past 10 years.
We define terminations for ethical misconduct as the removal of the CEO as a result of a scandal or misconduct by the CEO or other employees; examples include fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions.
For the purposes of this study and to distinguish between mature and emerging economies, Strategy& followed the United Nations Development Programme’s 2018 classification.
Total shareholder return data over a CEO’s tenure was obtained from Bloomberg and includes dividend reinvestment (if applicable). Total shareholder return data was then regionally market-adjusted (measured as the difference between the company’s return and the return of the major regional index over the same time period) and annualized.
CEO Transitions in 2023
The following contribution corresponds to the SpencerStuart consulting portal and is a report from the team.
The Measure of the Market
Spencer Stuart has long tracked CEO turnover among S&P 500 companies to offer a snapshot of leadership changes at the top of corporate America.
This year, we have expanded our research and analysis to a much broader set of companies: the 2023 report includes CEO transitions data for the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, and combined views of the full S&P 1500.
Since the S&P 1500 represents roughly 90 percent of U.S. market capitalization, we are able to share observations that account for the majority of public leadership transitions in the United States. In 2023, the number of S&P 1500 transitions declined from 2022 and has yet to return to pre-pandemic levels.
Transitions among large-cap S&P 500 companies had been on track for a “normal” year for transitions but were ultimately below pre-pandemic averages, weighed down by unusually low turnover in the fourth quarter.
The trend toward older CEOs and, among S&P 500 companies, experienced CEOs continued.
Across the S&P 1500, the average age of incoming CEOs is two years older than in 2022, and nearly 20 percent of new S&P 500 CEOs had previously served as public company CEOs. What is less evident in the data is the evolution we see in how boards are thinking about the qualities and capabilities needed in CEOs, both today and in the future.
How should the profile of CEOs evolve amid dramatic changes in the scale, scope, pace, and interconnectedness of business challenges and the broader, more complex stakeholder demands that CEOs face?
In addition to attributes traditionally associated with CEO excellence (such as strategic thinking and the ability to deliver results), boards are weighing attributes that point to candidates’ ability to adapt and respond to new challenges.
These include systemic thinkers who can understand the forces at play for the business, connectors who think more broadly about potential partners and ecosystems to expand opportunities, and agile operators with the skill and courage to act on the implications of these forces, the empathy to connect with diverse stakeholders, and the ability to cultivate and utilize an ecosystem of information and talent.
Transitions fall slightly overall, with differences across indices
S&P 1500 transitions have not recovered to pre-pandemic levels, and overall, fewer companies appointed new CEOs in 2023. Across the S&P 1500, 136 companies appointed new CEOs, down from 146 in 2022.
After the strongest first quarter in a decade (58 transitions vs. 65 in 2013), transitions were below historical averages the rest of the year and were particularly weak in the fourth quarter.
We believe some CEOs clung to the hope of an economic rebound and many boards pushed back succession timelines to retain an experienced CEO in the face of continued macroeconomic, social and geopolitical instability.
Forty-six S&P 500 companies appointed a new CEO in 2023, down from 56 in 2022, and down from the historically low level of 48 during the pandemic year of 2021.
CEO transitions among MidCap 400 companies rebounded to 40 in 2023, after hitting a 10-year low of 33 transitions in 2022. Fifty SmallCap 600 companies appointed new CEOs, a decrease from 2022.
Succession in Crisis Periods
Our research on CEO succession during crisis periods shows that transitions typically pick up around two years after the depth of a crisis as uncertainty eases and boards feel more confident about returning to long-term succession plans.
That has generally played out among larger companies, but we have seen different patterns among mid- and small-cap companies.
S&P 1500 CEO Transitions, 2022-2023
The consumer and healthcare sectors saw the highest CEO turnover in 2023, with 11% turnover during the year. The financial services sector saw the lowest turnover, with 7% turnover. Again, we see instability outside the company driving a desire for stability within the company.
TRANSITIONS AND TURNOVER BY INDUSTRY 2023
We continue to see a strong divergence between public and private capital markets, with public boards opting for an internal option perceived as less disruptive, while private investors more frequently look to hire external leaders (typically 75 percent or more of the time).
Historically, large- and mid-cap companies have leaned more heavily toward insider appointments
than smaller companies, as they can more easily leverage a division president or similar management structure to build well-rounded P&L leaders.
In 2023, 74 percent of new S&P 500 CEOs were internal appointments, compared with 82 percent in 2022.
We think the drop in 2023 reflects a couple of factors. More large companies faced market disruption or poor performance, making them more open to outside candidates.
At the same time, many management teams that matured together over the past four years through the pandemic did not experience the usual turnover, leaving some companies without logical internal successors.
Thirty-two new S&P 1500 CEOs in 2023 (24%) were outside appointments, and another 11 (8%) were board appointments, which we consider “the well-known outsider.”
This is up from 2022, when there were seven board appointments (5%). Board-appointed CEOs typically serve as a bridge solution when there is no “ready-to-act-now” internal successor or to provide stability in difficult times. They tend to be seasoned CEOs and may not have the experience or desire to hold a position for a long time.
After a surge in board appointments in 2020, when 13 percent of successors were board-appointed, these types of transitions declined in 2021 and 2022 as companies began to act more on planned successions that they may have delayed in earlier stages of the pandemic.
Who is an insider and who is an outsider?
Insider successors are internally promoted CEOs, former C-suite executives/CEOs, and “insider-outsiders,” two-step appointments who were recruited from outside the company and promoted to the CEO role within 18 months.
Outsider successors are externally recruited CEOs and include those appointed from the company’s board of directors.
CEO tenure falls, while the starting age of CEOs peaks at 10 years
The average age of outgoing CEOs across the S&P 1500 was 61.6 years
Lower than the 2022 average of 62.4 years and on par with a trend we’ve seen over the past few years. Across the S&P 1500, the average tenure of outgoing CEOs dropped from 9.9 to 9.0 years, which is at the low end of the historical range.
S&P 500 CEO tenure of 8.9 years continued to decline from its 2021 peak of 11.2 years and 10.2 years in 2022.
During the pandemic, tenure peaked for S&P 500 CEOs as many stayed on longer to provide a safe pair of hands amid disruption.
Incoming CEOs were noticeably older in 2023
And the average age at start of S&P 1500 CEOs hit an all-time high of 56.2 years, more than a year older than the previous high of 54.8.
The jump is especially notable in the S&P 500, where the average age fell to 53.8 years in 2022 and rebounded to 56.4, continuing a long-term trend of rising CEO age.
This is not surprising in a more uncertain period when there is greater reliance on leaders who have lived through more economic cycles.
Why are CEOs leaving?
Consistent with previous years, the vast majority of CEO transitions were attributed to the outgoing CEO’s decision to retire or leave for another role or for personal reasons.
Planned departures drove 86 percent of S&P 1500 transitions in 2023, the same as in 2022. Resignations under pressure rose to 10 percent from 5 percent in 2022, driven by a rise in ousters among S&P 500 companies, from 7 percent in 2022 to 16 percent in 2023.
Three MidCap 400 CEOs and three SmallCap 600 CEOs left under pressure. Resignations under pressure rose as performance declined at more companies and board members felt pressure from investors to take action.
We also saw increased scrutiny of leaders for their nonfinancial performance, with some leaving voluntarily or under pressure due to increasingly complex stakeholder management demands.
Such exits are even more common at S&P 500 companies, where media and investor scrutiny is more intense.
More COOs and Divisional CEOs Promoted to CEO
Our research shows that CEOs typically rise from four “last mile” roles: COOs, divisional CEOs, CFOs, and “leapfrog” leaders promoted from lower levels to senior management.
After 2022, when we saw a surge in CFO promotions to CEO, 2023 was the year of the COO.
57% of new S&P 1500 CEOs were promoted to COO or president, up from 43% in 2022.
Divisional CEO appointments also rose, from 17% in 2022 to 24%. This is just below the historically high level of divisional CEO appointments we saw in 2017 and 2019 (26% and 25%, respectively).
CFO appointments accounted for just 5% of transitions, down from 15% in 2022. 5% of appointments were “leapfrog” leaders, hired below the second tier of management, down slightly from 9% in 2022, when a notable number of CEOs were appointed from advisory roles and other senior management positions.
These changes reflect the impact of long-term succession planning that boards engage in many years before a transition to build more thoughtful transition paths.
Most new S&P 1500 CEOs were appointed from four “last mile” positions
“Leapfrog” appointments from positions below senior management
The remaining appointments came from other senior management positions, former public company CEOs, and former non-executive/advisory positions.
Looking across the indices, COO is the most common route to CEO, followed by divisional CEO.
“Leaping” appointments are consistently more common among mid- and small-cap companies than in the S&P 500. No leapfrog appointments were made among S&P 500 companies in 2023, but 9 percent of MidCap 400 and SmallCap 600 appointments came from positions below senior management.
Most new CEOs are first-timers
The majority of new S&P 1500 CEOs, 82 percent, are serving in their first CEO role at a publicly traded company.
This has been largely consistent over the past five years, although we see somewhat greater volatility within the indexes.
For example, 78 percent of new S&P 500 CEOs were first-time CEOs of publicly traded companies in 2023, up from 93 percent in 2022. Among the MidCap 400, 88 percent of new CEOs in 2023 were first-time CEOs of publicly traded companies, up from 85 percent in 2022, as were 82 percent of new SmallCap 600 CEOs, the same as in 2022. Of course, nearly all internal appointments are first-time CEOs, making this an unsurprising finding.
Consumer companies were the most likely to appoint experienced CEOs
As 31 percent of all incoming CEOs had prior experience as CEOs of publicly traded companies.
Gender diversity just shy of 2022 all-time high
13 percent of all new S&P 1500 CEOs (17) were women, just shy of the all-time high of 14 percent in 2022. These appointments bring the total number of female CEOs in the S&P 1500 to 111 from 1,517, or 7 percent.
Highest share of women: 14 percent of new SmallCap 600 CEOs were women. Among S&P 500 companies, 11 percent of CEO appointees were women, the same as in recent years, and the number of active female S&P 500 CEOs increased from 38 to 40 (8 percent).
All five of the incoming S&P 500 female CEOs were internal appointments, compared to 71 percent (29) of the newly appointed male CEOs.
Looking across sectors, industrial companies appointed the highest proportion of women, with seven of the 40 new CEOs (18 percent).
The consumer and industrial sectors have the highest percentage of active female CEOs, at 9 percent.
The healthcare and technology, media and telecommunications sectors each added one new female CEO. The technology sector has the lowest overall representation of active female CEOs.
Few CEOs are named chair of the board when they start
The percentage of new CEOs who are also immediately named chair has been steadily declining over time. In 2023, only 4 percent of new S&P 1500 CEOs were also named board chairs at the time of appointment, up slightly from 3 percent in 2022.
More boards appointed a CEO to support the transition
In recent years, we have seen an uptick in the share of boards appointing a CEO to facilitate the transition from a successful, long-serving CEO to an internal candidate or to provide continuity following the appointment of an outside CEO.
Nearly half of new S&P 1500 CEOs (43%) were appointed alongside a CEO. Mid-cap companies were the least likely to adopt this practice, with 30% having a CEO during a CEO transition.
The CEO is most likely to be the outgoing CEO. In 41% of S&P 500 CEO transitions, the former CEO is appointed as CEO.
In 11% of transitions, a non-predecessor was CEO. Among mid- and small-cap companies, 20% and 28%, respectively, of active CEOs in office when a CEO is appointed were the predecessor.
In most cases, CEOs serve for a short period of time, approximately one to two years.
CEO Status by Index
A CEO can provide stability and continuity during the initial transition period to a new CEO, ideally providing strategic perspective and hands-on onboarding support to the new CEO during the transition.
However, our research on the CEO model finds mixed performance; more than half (54%) underperformed their peers, by an average of 14%.
The remaining 46% outperformed by an average of 14%.1 Having a CEO can be advantageous, when there is trust and a clear division of responsibilities between the CEO and the executive chairman.
Performance was measured using CAGR, which discounts performance by the number of years and is not purely cumulative unlike TSR.
We then compared the company’s average CAGR values over the CEO’s tenure to the average CAGR of its relative peer group.
Peers were generated using S&P Capital IQ’s back-end algorithm which takes into account
(1) analyst coverage
(2) financial/trading pricing requirements
(3) company location
(4) revenue
(5) industry coverage
Companies with publicly traded CEOs, headquartered in the US, and a market cap of +500M were included in the analysis.