CEO Succession Practices: 2017 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2017 Edition, an annual benchmarking report authored by Dr. Tonello and Gary Larkin of The Conference Board with Prof. Jason Schloetzer of the McDonough School of Business at Georgetown University, and made possible by a research grant from executive search firm Heidrick & Struggles. For a Washington Post story discussing the key findings from the study, click here. For details regarding how to obtain a copy of the report, contact [email protected]. Related research from the Program on Corporate Governance includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

According to a new report by The Conference Board, in 2016 CEO exits from underperforming companies have risen to a level unseen in 15 years amid record-high dismissals in the retail sector. In particular, last year the CEO of poorly performing companies had a 40 percent higher probability of being replaced than in 2015 and a 60 percent higher probability of being replaced than the CEOs of better-performing companies. The report, CEO Succession Practices: 2017 Edition, annually documents and analyzes succession events of chief executives of S&P 500 companies. In 2016, there were 63 cases of S&P companies that underwent a CEO turnover.

In 2016, The Conference Board found that poorly performing companies (i.e. those with an industry-adjusted two-year total shareholder return (TSR) in the bottom quartile of the S&P 500 sample) had a record-high CEO succession rate of 17.1 percent, up sharply from the 12.2 percent of 2015. It is the highest rate of turnover seen for this group of companies since 2002 and higher than the 2001-2016 average of 13.9 percent. The major driver of this surge in 2016 is the exceptional number of CEO dismissals in the wholesale and retail trade sector, which—battled by a stronger dollar, weak emerging markets, and the rise to dominance of online one-stop-shop competitors such as Amazon—was widely reported as among the biggest job cutters in recent years. In this business industry, CEO dismissals were 50 percent of the total succession tally for 2016, compared to 14.3 percent in the prior year. Oil and gas extraction companies also experienced a spike in dismissals, with 75 percent of CEO succession cases in 2016 classified by The Conference Board as disciplinary, compared to 25 percent in the prior year.

Another notable finding from the report is that companies are becoming more communicative about their CEO succession plans so as to avoid surprising market participants. Communication practices more commonly include providing earlier notice of the CEO succession event, including the description of the role performed by the board of directors in the CEO succession process, and offering more details on the reasons for the transition. In particular, compared with a year earlier, in 2016 boards were 30 percent less likely to announce that the transition was effective immediately.

Other key findings in the report include:

  • The stability seen in the succession rate of better-performing companies may indicate that increased scrutiny over executive pay and performance has started to produce results. The succession rate of better-performing companies has shown minimal year-on-year fluctuation, especially in recent years and when compared with the succession rate of worse performers. In the last three years, in particular, the succession rate of CEOs of better-performing companies varied from 9.2 percent to 10.6 percent—for an average of 9.6 percent for the entire 15-year period covered by the study. In comparison, in the last three years, the CEO succession rate of poorly performing companies ranged from 11.3 percent 17.1 percent. Even in years of higher CEO turnover, such as 2016, the succession rate found among better-performing companies was only 15 percent higher than the prior year, while the succession rate of poorly performing companies jumped by 40 percent. The finding may reflect the pressure that new regulations and shareholders are putting on listed companies to introduce more rigorous metrics of long-term financial performance and ensure the alignment of CEO compensation with such measurable results. In today’s governance and investment climate, CEOs who achieve better performance benefit from even greater job stability while underperforming CEOs are even more exposed to public scrutiny. Such scrutiny may ultimately limit the board’s discretion to keep the underperformer.
  • High rates of CEO turnover are also seen among consumer products companies, another signal that the sector is bracing for new strategic and market changes. Analysts contend that the consumer products industry is among the most vulnerable to today’s changes and disruptions. Multiple factors are driving the transformation of the business sector, including: shifts in consumer spending patterns, the advent of the “Internet of Things,” a changing mindset across market segments (with older age groups joining the ranks of digital users and younger generations embracing a new breed of sustainable products), as well as a shift in the global marketplace due to the expanding middle class in the Asia-Pacific region. That these changes require fresh leadership and a renewed strategic vision is confirmed by data on CEO turnover, which, at 20 percent (up from 10.2 percent in the prior year), was by far the highest of all industries in 2016 and among the highest ever recorded by The Conference Board for a single peer group of companies. In contrast, companies in the manufacturing and services industries reported the lowest overall succession rate by industry, or less than 8.0 percent for each sector.
  • Much-talked about, gender diversity continues to be elusive at the helm of the largest US public companies, as only six of the 63 CEO positions that became available in the S&P 500 in 2016 were filled by a woman. In 2016, only 9.5 percent of the total number of CEO turnovers recorded by The Conference Board among companies in the index resulted in the appointment of a female candidate. The newly named CEOs include Adena Friedman of NASDAQ, Shira Goodman of Staples, and Michele Buck of The Hershey Company. However discouraging it sounds, this finding is far from the worst in recent years if one considers, for example, that only one woman was named CEO of a S&P 500 company in 2015—the lowest share reported by The Conference Board since 2010. The highest percentage of incoming women CEOs is 18.2 during 2011, when 10 of the 55 cases of CEO succession resulted in a woman as the new chief executive. Overall, female representation in S&P 500 top leadership has grown significantly since 2001, when there were only six women CEOs. That number rose to its highest levels in 2013 and 2014, when it hit 24 in both years. The highest impact of female CEO departure was seen in 2010, when four of the then 12 women CEOs in the S&P 500 (or 33.3 percent) left their position; in the same year, as in 2015, only one of them was replaced with another woman. In 2011, however, the number of incoming women CEOs (10) far exceeded the number of female departures (four), therefore reversing the decline in the total number of S&P 500 women CEOs registered in 2010. In the last two years, the highest percentage of female appointments (10 percent) was seen in the finance and insurance industries, while consumer product companies have the highest number (six) of women CEOs.
  • After years of sharp rise, the succession rate of older CEOs has started to normalize at levels seen before the financial crisis, confirming the completion of a generational shift in business leadership. Following the 2008 financial crisis, The Conference Board study reported an acceleration of the rate of succession of CEOs aged 64 years or older: in the 2009–2014 period, their average turnover rate was 25.5 percent, compared to the 8.1 percent seen for younger CEOs. In the last couple of years, however, this phenomenon came to a halt: older CEOs departed in 2015 and 2016 at a rate of 15.1 percent and 16.1 percent, respectively, which is much more aligned with the historical succession rate that The Conference Board reported for their age group in the 2001–2008 period. Overall, this finding suggests that a generational shift in executive leadership might have run its course amid an improvement in firm performance and general economic context. Today, among S&P 500 companies, only 11 CEOs (or fewer than 3 percent of the total) are aged 72 or older: They include Warren Buffett (86 years old) of Berkshire Hathaway, Fred Smith (72) of FedEx, Stefano Pessina (76) of Walgreens Boots Alliance, and Ralph Lauren (77) of the eponymous apparel company; in all cases but one—Seifi Ghasemi (72) of Air Products & Chemicals, named CEO in 2014—these individuals have led their companies for many years or even decades. New incoming CEOs are, on average, in their early- to mid-fifties, while the appointment to the top job of executives aged 60 or older is quite uncommon.
  • Departing CEO tenure in 2016 was nine years, but five percent of S&P 500 companies are led by CEOs with tenures of 20 years or longer. In 2009, at the peak of the financial crisis, the average CEO of an S&P 500 company held the 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, departing CEO tenure in these large companies started to rebound soon after, rising to 8.4 years in 2011, 9.7 in 2013, 9.9 in 2014, and 10.8 in 2015. (In 2015, the number was partly skewed by Rupert Murdoch of media empire 21st Century Fox, who left his post after a 36-year tenure). In 2016, departing CEO tenure was nine years, close to the 8.9-year average reported by The Conference Board since 2001. Several factors, including stricter board oversight practices introduced after the Enron scandal and the public scrutiny over pay for performance, may help explain the decline in CEO tenure observed in the 2003–2010 period. The slight reversal of the trend that started in 2011 is likely due to improved economic conditions as well as the natural deceleration of the generational change that a decade of shorter tenure data had been signaling. The longest-tenured CEOs currently serving at S&P 500 companies include Leslie H. Wexner of fashion retailer L Brands Inc. (who has been on the job for 54 years), Warren Buffett of Berkshire Hathaway (47 years), and Alan Miller of hospital management company Universal Health Services (39 years). With a 21-year tenure, Jeff Bezos of also made the list of longest-serving CEOs.
  • One out of 10 CEO successions in 2016 were navigated by an interim CEO, a role once used only in situations of emergencies and unplanned transitions. Gradual transitions have become more common and so has the option for the appointment of interim CEOs. In each of the last two years, approximately 10 percent of CEO succession events involved an interim appointment. This has happened, for example, at the media company Viacom, the office supplier Staples, and the discount travel Priceline Group. In these and other cases, the length of service for interim CEOs ranged from one month to nearly two years, with two boards (Viacom and Staples) ultimately offering the permanent position to the executive serving in the interim (Bob Bakish and Shira Goodman, respectively). Previously used in situations of emergency, the practice no longer necessarily reveals shortcomings in the planning process or the need to indefinitely prolong the search for a successor. Instead, it can be implemented for a variety of reasons: to audition the person who is already expected to become permanent CEO; for the interim to groom the eventual candidate to the position; or to serve as “seat warmer” and better manage the public relations aspects of a lengthier leadership transition.
  • The immediate appointment of the incoming CEO as board chairman has become a rare exception, as proxy advisors and the investment community increasingly demand independent board leadership Only 6.4 percent of the successions in 2016 involved the immediate joint appointment of the new CEO as board chairman—the lowest level ever reported by The Conference Board. This finding should be reviewed in conjunction with data on board practices evidencing the growing propensity of US companies, including the larger ones, to either strengthen the independence of the board of directors and ensure a separate and impartial leadership of the oversight body or use the succession as a way for the incoming CEO to earn the additional title of board chairman. In 2016, nine of 10 companies that underwent a CEO succession either already had a board chairman or appointed an outsider to the role who met securities exchange independence standards.
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