Tag: Executive turnover


New Statistics and Cases of CEO Succession in the S&P 500

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2015 Edition, a Conference Board report supported by a research grant from Heidrick & Struggles and authored by Dr. Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2015 Edition, a Conference Board report supported by a research grant from Heidrick & Struggles and authored by Dr. Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

CEO Succession Practices, which The Conference Board updates annually, documents CEO turnover events at S&P 500 companies. The 2015 edition contains a historical comparison of 2014 CEO successions with information dating back to 2000. In addition to analyzing the correlation between CEO succession and company performance, the report discusses age, tenure, and the professional qualifications of incoming and departing CEOs. It also describes succession planning practices (including the adoption rate of mandatory CEO retirement policies and the frequency of performance evaluations) and disclosure, based on findings from a survey of general counsel and corporate secretaries at more than 300 U.S. public companies.

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When Executives Fail: Managing Performance on the CEO’s Team

The following post comes to us from Mark Nadler, Principal and co-founder of Nadler Advisory Services, and is based on a Nadler white paper.

The following post comes to us from Mark Nadler, Principal and co-founder of Nadler Advisory Services, and is based on a Nadler white paper.

Picture, if you will, the chief executive officer of a Fortune 500 company slumped over a conference table, holding his head in his hands, anguishing over whether the time had come to pull the plug on one of his most senior executives. “Tell me,” he asks in despair, “is it this hard for everybody?”

Yes, it is.

Of all the complex, sensitive, and stressful issues that confront CEOs, none consumes as much time, generates as much angst, or extracts such a high personal toll as dealing with executive team members who are just not working out. Billion-dollar acquisitions, huge strategic shifts, even decisions to eliminate thousands of jobs—all pale in comparison with the anxiety most CEOs experience when it comes to deciding the fate of their direct reports.

To be sure, there are exceptions. Every once in a while, an executive fouls up so dramatically or is so woefully incompetent that the CEO’s course of action is clear. However, that’s rarely the case. More typically, these situations slowly escalate. Early warning signs are either dismissed or overlooked, and by the time the problem starts reaching crisis proportions, the CEO has become deeply invested in making things work. He or she procrastinates, grasping at one flawed excuse after another. Meanwhile, the cost of inaction mounts daily, exacted in poor leadership and lost opportunities.

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Understanding Corporate Governance Through Learning Models of Managerial Competence

The following post comes to us from Benjamin Hermalin, Professor of Finance at the University of California, Berkeley; and Michael Weisbach, Professor of Finance at Ohio State University.

The following post comes to us from Benjamin Hermalin, Professor of Finance at the University of California, Berkeley; and Michael Weisbach, Professor of Finance at Ohio State University.

The central focus of research in corporate governance has historically been on the problems of controlling managers’ actions. Without minimizing the real-world importance of such control problems, in our paper, Understanding Corporate Governance Through Learning Models of Managerial Competence, which was recently made publicly available on SSRN, we argue that such a focus is incomplete and ignores important factors affecting corporate governance. In particular, it overlooks the crucial element of career concerns: managers care about the inferences that current and future employers draw over time about their abilities from observing their performance.

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The Executive Turnover Risk Premium

The following post comes to us from Florian Peters, Assistant Professor of Finance at the University of Amsterdam and Alexander Wagner, Professor of Finance at the University of Zurich.

The following post comes to us from Florian Peters, Assistant Professor of Finance at the University of Amsterdam and Alexander Wagner, Professor of Finance at the University of Zurich.

In our forthcoming Journal of Finance paper, The Executive Turnover Risk Premium, we make the simple point that forced turnover risk explains an important part of the cross-sectional variation of compensation for the CEOs of public U.S. corporations. The empirical magnitude of the turnover risk premium—about 7% greater subjective compensation for a one percentage point increase in turnover risk—is in line with calibrated theoretical predictions.

To identify the turnover risk premium, we use sources of job risk that are arguably outside the CEO’s control such as changing industry conditions. This strategy relies on the idea that, in practice, firing occurs not only when the CEO reveals low general ability. Rather, a board may fire a CEO when industry conditions change in such a way that his skill set no longer matches the new industry requirements. It is this kind of exogenous risk exposure that should plausibly be compensated in CEO pay.

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Board Challenges: The Question of CEO Succession

The following post comes to us from Wayne Lord, president of the World Affairs Council of Atlanta. This post is based on a white paper report from the 2013 Global Strategic Leadership Forum by Dr. Lord, available here.

The following post comes to us from Wayne Lord, president of the World Affairs Council of Atlanta. This post is based on a white paper report from the 2013 Global Strategic Leadership Forum by Dr. Lord, available here.

The World Affairs Council of Atlanta’s 2013 Global Strategic Leadership Forum focused on a critical issue facing boards of directors: CEO succession. As arguably its most crucial responsibility, the board’s process for hiring and developing CEOs must be an extraordinarily thorough one that addresses the complexities of the modern global company. While there is no exact template that fits all circumstances, the board must ensure that its processes and oversight accurately reflects the organization’s future needs, identifies the skills and experience required in today’s complex global economy, and builds and closely monitors a truly robust succession plan.

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CEO Succession in the S&P 500: Statistics and Case Studies

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2014 Edition, a Conference Board report authored by Dr. Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2014 Edition, a Conference Board report authored by Dr. Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

CEO Succession Practices, which The Conference Board updates annually, documents CEO turnover events at S&P 500 companies. The 2014 edition contains a historical comparison of 2013 CEO successions with data dating back to 2000. In addition to analyzing the correlation between CEO succession and company performance, the report discusses age, tenure, and the professional qualifications of incoming and departing CEOs. It also describes succession planning practices (including the adoption rate of mandatory CEO retirement policies and the frequency of performance evaluations), based on findings from a survey of general counsel and corporate secretaries at more than 150 U.S. public companies.

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Excess Risk Taking and Competition for Managerial Talent

The following post comes to us from Viral Acharya, Professor of Finance at NYU; Marco Pagano, Professor of Economic Policy at the University of Naples Federico II; and Paolo Volpin, Professor of Finance, Cass Business School.

The following post comes to us from Viral Acharya, Professor of Finance at NYU; Marco Pagano, Professor of Economic Policy at the University of Naples Federico II; and Paolo Volpin, Professor of Finance, Cass Business School.

Excessive risk-taking by financial institutions and overly generous executive pay are widely regarded as key factors in the 2007-09 crisis. In particular, it has become commonplace to blame banks and securities companies for compensation packages that reward managers (and more generally, other risk-takers such as traders and salesmen) generously for making investments with high returns in the short run but large risks that emerge only in the long run. As governments have been forced to rescue failing financial institutions, politicians and the media have stressed the need to cut executive pay packages and rein in incentives based on options and bonuses, making them more dependent on long-term performance and in extreme cases eliminating them outright. It is natural to ask whether this is the right policy response to the problem. It is crucial to ask what is the root of the problem—that is, precisely which market failure produced excessive risk-taking.

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CEO Job Security and Risk-Taking

The following post comes to us from Peter Cziraki of the Department of Economics at the University of Toronto and Moqi Xu of the Department of Finance at the London School of Economics.

The following post comes to us from Peter Cziraki of the Department of Economics at the University of Toronto and Moqi Xu of the Department of Finance at the London School of Economics.

In our paper, CEO Job Security and Risk-Taking, which was recently made publicly available on SSRN, we use the length of employment contracts to estimate CEO turnover probability and its effects on risk-taking. Protection against dismissal should encourage CEOs to pursue riskier projects. Indeed, we show that firms with lower CEO turnover probability exhibit higher return volatility, especially idiosyncratic risk. An increase in turnover probability of one standard deviation is associated with a volatility decline of 17 basis points. This reduction in risk is driven largely by a decrease in investment and is not associated with changes in compensation incentives or leverage.

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Delaware Court Upholds CEO Removal and Determines Board Composition

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Klaassen v. Allegro Development Corporation, 2013 WL 5739680 (Del. Ch. Oct. 11, 2013), Eldon Klaassen, the former CEO of Allegro Development Corporation (“Allegro”), brought an action under Section 225 of the Delaware General Corporation Law, requesting that the Court of Chancery declare that he: (1) was still the CEO of Allegro, (2) had validly removed two of Allegro’s directors and appointed their replacements, and (3) had validly filled a preexisting director vacancy. Klaassen claimed that his removal as CEO of Allegro by the board of directors (the “Board”) was void. If he was indeed still CEO, he had the power to remove directors and appoint new ones under Allegro’s governing documents. In a post-trial opinion, the Court of Chancery found that Klaassen was barred from challenging his removal as CEO by the equitable doctrines of laches and acquiescence. Regarding his changes to the Board, the Court of Chancery determined that Klaassen did succeed in removing one director and filling the preexisting vacancy on the Allegro Board, but that he did not remove the second director and new CEO, nor validly appoint a replacement for the removed director.

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Does the Market for CEO Talent Explain Controversial CEO Pay Practices?

Martijn Cremers is a Professor of Finance at the University of Notre Dame. Yaniv Grinstein is an Associate Professor of Finance at the Johnson Graduate School of Management at Cornell University.

Martijn Cremers is a Professor of Finance at the University of Notre Dame. Yaniv Grinstein is an Associate Professor of Finance at the Johnson Graduate School of Management at Cornell University.

Considerable debate remains among academics and practitioners regarding the economic forces that drive CEO compensation practices in the United States. Some view the market for CEO talent as the main economic force that drives the level and form of CEO compensation (e.g., Rosen, 1992; Gabaix and Landier, 2008). Others argue that these forces have little effect on CEO compensation because of frictions such as managerial entrenchment, asymmetric information, and transaction costs of replacing managers, believing instead that compensation practices are by and large driven by the bargaining power that the CEO has vis-à-vis the board (e.g., Bebchuk and Fried, 2003).

The debate has intensified in recent years due to several controversial compensation practices, a first example of which is the tendency of firms to benchmark CEO compensation to that of other CEOs. While some find benchmarking consistent with competitive compensation (Holmstrom and Kaplan, 2003; Bizjak et al., 2008), others argue it is a way for CEOs to increase their compensation by benchmarking themselves to highly paid CEOs (e.g., Faulkender and Yang, 2010).

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