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.

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.

The report, which The Conference Board published thanks to a research grant from Heidrick & Struggles, also features an in-depth discussion of recent case studies—including General Motors and Wal-Mart (two cases of insider promotion), J.C. Penney (a case of departure due to poor performance), Procter & Gamble (a case of sudden retirement), PetSmart (where the retirement was planned and announced early), and Time Warner Cable (a case of CEO apprenticeship). Finally, the research analyzes episodes of shareholder activism on CEO succession planning at Google and Sirius XM Holdings.

In 2013, the percentage of S&P 500 companies that fired their CEO was the lowest since 2010. The study reveals that only 23.8 percent of all CEO turnover events reported last year by companies in the index were due to dismissal, compared to the 24 percent recorded in 2010 and 25.5 percent in 2011. As a result, CEO tenure grew in 2013 to 9.7 years, reversing a decade-long declining trend. While improved overall financial performance is the most likely explanation, this finding is also indicative of the regained trust in business progressively shown by investors after the financial market crash of 2008.

This is welcoming news on many levels, as it means that the relationship between boards and CEOs is relieved of the tension it suffered during the long years of the financial crisis. However, a false sense of security may lead boards to reduce their commitment to succession planning and leadership development. The next crisis could be around the corner, the market won’t always be bullish and CEO performance should anyway be about much more than stock prices. Being prepared for a change of leadership should always be a top priority for directors, irrespective of the confidence in the moment. For this reason, the study includes an Appendix providing recommendations to boards of directors overseeing the succession planning process.

The following are some of the other major findings discussed in the report:

The number of companies in the S&P 500 that also elected their new CEO as chairman of the board of directors was down significantly in 2013. Only 9.5 percent of the CEO successions at S&P 500 companies in 2013 involved the immediate joint appointment of the CEO as board chairman, down from 18.8 percent in 2012, and 19.2 percent in 2011. This trend is likely a result of the move in recent years by many large companies to separate their chairman and CEO roles. However, it is unclear whether the split roles persist, since many chairmen are the departing CEOs who typically exit the firm within one fiscal year.

Most departing CEOs remained as board chairman for at least a brief transition period. Based on a review of 2013 succession announcements, 52.4 percent of departing CEOs remained as board chairman for at least a brief transition period, typically until the next shareholder meeting. This rate is higher than the approximately 33 percent rate reported in 2012.

While employee tenure across the labor market has stayed relatively stable, the average tenure of a departing CEO has declined. The average tenure of a departing S&P 500 company CEO has decreased in recent years, from approximately 10 years in 2000 to 8.1 years in 2012. In contrast, employee tenure across the broader labor market has remained relatively stable during the past 25 years, averaging 5.1 years in 2008, compared with 5.0 years in 1983. The year 2013 was an outlier, with an average departing CEO tenure of 9.7 years—the longest since 2002, presumably due to the lower rate of dismissals recorded in 2013 as well as CEO retirements that were delayed for economic considerations during recent global economic turmoil.

The overall upward trend of outsider promotions continued through 2012, although the rate of outside appointments has stabilized in recent years. The upward trend recorded since the 1970s in the appointment of “outsiders” (those who had served less than one year with the company) to the CEO role continues, but the momentum has slowed. In 2013, 23.8 percent of incoming CEOs were brought in from outside the company, a modest decrease from the 27.1 percent rate in 2012. The remaining 76.2 percent of incoming CEOs in 2013 were “insiders,” or senior executives promoted to the CEO position after serving at least one year with the company.

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