Today, The Conference Board published The CEO Succession Report, which examines CEO succession events at S&P 500 companies for 2001-2011. The report was authored by Jason D. Schloetzer, Matteo Tonello and Melissa Aguilar. Key findings include:
- 2011 CEO succession rate was 10.8 percent. This rate was consistent with the average number of annual succession announcements from 2000 through 2010.
- CEO succession more likely to follow poor company performance. The study found that the probability of CEO succession is higher following poor company performance than when performance has been strong. In the 2000–2011 period, the succession rate among CEOs of poorly performing companies averaged 14 percent, compared with 10 percent for higher performing companies.
- CEO dismissals account for a significant portion of CEO succession events. Since 2008, which roughly coincides with the beginning of the financial crisis, 29 percent of all succession events were associated with CEO dismissals.
- Outside hires continue to account for a significant portion of CEO succession events. In 2011, 19 percent of successions involved appointing an outsider as CEO, which is consistent with the continuing trend in outside hiring that has been recorded since the 1970s.
- Higher performing companies appoint a seasoned inside executive as CEO successor. Only 7 percent of incoming CEOs at companies that performed poorly were seasoned inside executives compared to 43 percent of incoming CEOs at companies with better performance.
In reviewing the Report, Dr. Paul C. Winum, Senior Partner and Global Practice Leader at RHR International, LLP, said: “The Conference Board’s CEO Succession report each year highlights key trends from CEO succession events in S&P 500 companies. The 10.8% succession rate reported for these companies in 2011 translates to 54 companies who turned over their CEOs last year. With Apple’s nearly $500 billion market cap among these and an average of more than $24 billion market cap for S&P 500 companies in general, the combined market capitalization of companies with new CEOs in 2012 is more than a trillion dollars. Considering those numbers and the reality that CEO leadership is arguably the highest impact factor influencing a company’s performance, it is easy to see why many consider the selection and deselection of the Chief Executive a board’s most critical responsibility.”
A key bottom line: Higher performing companies replace their CEOs less frequently and, when they do, they are likely to replace the CEO with a seasoned company executive. Said another way, higher performing companies have processes in place to develop a pool of talented internal CEO candidates.
Despite this, outside hires continue to be a relatively high percentage of CEO successors.
“The finding that 19% of new CEOs were selected from outside the company should raise a red flag for directors of those companies about the lack of viable internal successors,” Winum continues. “This is particularly concerning when coupled with the report’s findings that higher performing companies were much more likely to replace the incumbent CEO with an insider and poorer performing companies replacing their CEOs with outsiders. With external hires generally presenting a riskier track record of success in the CEO role, boards would be well advised to redouble their efforts to ensure that a strong pipeline of internal candidates are being actively developed for potential succession into the CEO position. The cost of this kind of investment in the development of top talent is a tiny fraction of the cost of not doing so.”
Conclusion: If you are a director or highly placed executive, you need to take a hard look at your CEO succession practices and what they say about your company, your board, and the company’s future performance.
The Report also provides information about developing a successful CEO succession planning process. I’ll cover those tips in a separate post.
Barbara Blackford is currently a Senior Advisor to The Conference Board Governance Center. Barbara recently retired from Superior Essex Inc., a Fortune 750 wire and cable manufacturer acquired by LS Corp, a leading South Korea exchange listed company and a member of the LS Group. Barbara has also served as General Counsel of AirGate PCS, a NASDAQ listed Sprint affiliate and Associate General Counsel of Monsanto Company. While at Monsanto, she was head of the Corporate Securities, Corporate Governance and Mergers & Acquisitions legal functions and oversaw more than $40 billion in M&A activity. In all of these roles, she was primarily responsible for providing legal support to the Board of Directors, securities compliance and executive compensation. Barbara served on the Board of Directors of the Society of Corporate Secretaries and Governance Professionals and is a frequent speaker on governance and securities laws. She served as the Reporter for The Conference Board Task Force on Executive Compensation.