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.

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.

The report, which The Conference Board published thanks to a research grant from Heidrick & Struggles, features an in-depth discussion of recent case studies—including Kraft Foods, Microsoft, Oracle, Walgreens, and Darden Restaurants. Finally, the research analyzes an episode of shareholder activism on CEO succession planning that took place at Carnival.

Less than 16 percent of CEO turnover in 2014 was due to dismissal, the lowest percentage in a decade and down from the 23.8 rate in 2013 and the 29.4 rate recorded in 2012. Over the years, monitoring CEO turnover events has enabled The Conference Board to keep a finger on the pulse of the top business leadership in the country. The lower dismissal rate found this year is, at least in part, a function of the marked signals of improvement in the broader U.S. economy. A softer rate was also foreseeable in light of the high turnover reported by S&P 500 companies in the last few years, when approximately one out of four departing CEOs was let go by the company board.

The findings also show that successions involving the immediate joint appointment of the incoming CEO as board chairman continued to decline, as the model of independent board leadership makes inroads even among the largest companies. Only 8.0 percent of the successions in 2014 involved immediate joint appointment as board chairman, down from 9.5 percent in 2013 and 18.8 percent in 2012. Based on a review of the 2014 succession announcements, 34.7 percent of departing CEOs remained as executive or nonexecutive board chairman for at least a brief transition period, typically until the next shareholder meeting. The findings, in conjunction with data included in the report on board practices, are evidence of the growing propensity by U.S. companies to strengthen board independence and to assure separate, impartial leadership of the oversight body.

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

  • In a significant shift, the majority of public companies now delegate CEO performance oversight to the compensation committee of the board of directors. In 2014, for the first time, the prevalent practice of involving the full board in the CEO performance evaluation process appears to have lost ground in favor of the delegation to the compensation committee. The scrutiny of the link between pay and performance and the increasing specialization of the compensation committee in defining the appropriate performance targets for the C-suite are the most likely explanation for this finding. The most striking case is the financial services industry, where 49.1 percent of respondents assign CEO performance evaluation responsibilities to the compensation committee, compared to the 21.1 percent of companies in that industry that maintain those responsibilities at the full board level.
  • Policies that permit retaining a departing CEO on the board are waning in popularity, as companies become more sensitive to board independence and to the risk of undermining the new leadership. While more common in the past, policies that explicitly permit keeping the former CEO involved as a board member are adopted by a small minority of firms today. Across industries, a large majority of companies indicated that they do not have a formal policy of this type. In fact, 17.6 percent of manufacturing companies require the departing CEO to also resign from the board, whereas only 4 percent explicitly permit continued board tenure.
  • Among the best performers in the S&P 500, the probability of CEO succession surged in 2014, reversing the declining trend of the last few years. The 2014 data shows a rebalancing of CEO turnover rates between top and bottom performers in the index. Companies in the top quartile by stock performance registered a 9.9 percent succession rate, compared to 6.9 percent in 2013. Though consistent with the average of 9.5 percent among better-performing companies for the 2001-2014 period, the 2014 rate reversed a decline observed among this subgroup since 2011, and may signal a change of leadership in cases where CEOs had previously prolonged their tenure to avoid altering investor confidence. On the other hand, companies in the bottom quartile, having already experienced extensive market scrutiny of their executive performance in the last few years, were less likely to witness a CEO turnover event in 2014. Their succession rate was 11.3 percent, down from 15.6 percent in 2010 and compared to an average of 13.7 percent for the entire 2001-2014 period.
  • A generational change in business leadership appears to be in course and, in 2014, older CEOs were three times more likely to leave their post. The succession rate for a CEO who is at least 64 years of age reached 28.6 percent, the highest level of the last few years and almost three times the average succession rate for the entire S&P 500 in 2014. By contrast, the average succession rate among younger CEOs was 6.0 percent. The average percentage of turnover events involving older CEOs was 19.9 percent for the entire period. In 2001, older CEOs had less than half of today’s probability of being replaced. Meanwhile, the succession rate for younger CEOs was fairly consistent across the sample, ranging from 5.5 percent to 13.4 percent—on average, 9.5 percent for the period.
  • The rate of CEO succession had significant variation across industry groups during 2014, presumably reflecting the soft financial performance of some sectors vulnerable to uncertainties in the consumer market and controlled energy production. The services, wholesale and retail, consumer products, and extraction industries had a succession rate greater than 10.0 percent in 2014. An explanation may be found in the poor stock performance of the retail sector and consumer product sectors, which missed sales expectations in 2014 during a weaker-than-expected Christmas holiday season, and the cash savings resulting from scaled-back inventory purchases. The oil and other natural resource extraction companies plummeted in the equity market in the second half of 2014, as the Organization of the Petroleum Exporting Countries reduced demand forecasts in the United States while maintaining existing production levels. By contrast, companies in the financial and insurance, transportation and communication, and manufacturing industries had an overall succession rate less than 10.0 percent in 2014, in line with or lower than the level found in 2013.
  • More stable economic conditions and the improved corporate performance of the last couple of years have halted the declining trend in average CEO tenure observed by The Conference Board in the first decade of the century. In 2009, at the peak of the financial crisis, the average CEO of an S&P 500 company held his position for 7.2 years, the shortest average tenure registered by The Conference Board and down from the 11.3 years found in 2002. However, CEO tenure in large companies started to rebound soon after, rising to 8.4 years in 2011, 9.7 in 2013, and 9.9 in 2014—the longest since 2002. Two long-tenured CEOs who departed in 2014, Larry Ellison (37-year tenure, Oracle) and Peter Rose (26-year tenure, Expeditors International of Washington), contributed to the 2014 results. Excluding these two CEOs from the analysis results in an average tenure of 9.0 years in 2014, which is more generally representative of the average tenure of 8.7 years between 2001 and 2014.
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