The Conference Board has just released the 2012 edition of CEO Succession Practices, its annual report documenting leadership turnover events at S&P 500 companies.
One of the most important strategic risks that a corporation must manage is the succession of its chief executive officer. This is true today, more than ever, due to the extraordinary challenges posed by the economic times we live in and the increased turnover of top business leaders. To make an informed decision, the board should understand not only the technical knowledge and experience necessary to effectively lead the company into the future, but also the context and practices of the succession planning process.
The purpose of CEO Succession Practices is to provide such background information and serve as a practical tool to the corporation in the performance of this critical task.
In its News Release, The Conference Board highlighted the following key findings:
CEO succession rate
In 2011, 55 CEOs in the S&P 500 left their post. The rate of CEO succession was 10.8 percent, consistent with the average number of annual succession announcements from 2000 through 2010.
Company performance and CEO age as determinants
The probability of CEO succession is higher following poor performance. In the 2000–2010 period, the succession rate of CEOs of poorly performing companies averaged 14.0 percent, ranging from a high of 21.2 percent to a low of 10.0 percent. In 2011, the succession rate of CEOs of poorly performing companies was consistent with the prior trend at 12.7 percent. The succession rate of CEOs of better performing companies varied from 6.5 percent to 11.6 percent during the 2000-2010 period, averaging, 9.7 percent. In 2011, the succession rate of CEOs of better performing companies was 10.3 percent.
The probability of CEO succession is also higher for CEOs who are at least 64 years of age. In the 2000–2011 period, the succession rate of CEOs who were at least 64 years old ranged from 29.0 percent to 9.4 percent (on average, 18.4 percent over the period), while the succession rate of younger CEOs ranged from 8.3 percent to 13.4 percent (on average, 10.1 percent over the period). The rate of CEO succession for younger CEOs is remarkably consistent across the sample.
CEO dismissal rates
CEO dismissal rates vary across the 2000–2011 period, ranging from a high of 40.0 percent in 2002 to a low of 16.2 percent in 2005 (on average, 28.2 percent for the period). Despite that variance, the rate of CEO dismissals for the 2000–2005 period, at 28.6 percent, is similar to the rate for the 2006–2011 period, at 27.9 percent. Since 2008, which roughly coincides with the beginning of the financial crisis, 28.6 percent of all succession events were associated with CEO dismissals.
Inside promotions and outside hires
Consistent with a continuing trend in the hiring of outsiders that has been recorded since the 1970s, 19.2 percent of successions in 2011 involved an outsider CEO appointment.
Joint election as board chairman
Only 19.2 percent of the 55 successions in 2011 involved the immediate joint appointment of an individual as CEO and chairman of the board of directors. Based on reviewed succession announcements, the majority of departing CEOs remained as board chairman for at least a brief transition period, typically until the next shareholder meeting.
The report is organized in four parts:
Part I: CEO Succession Trends (2000-2011) illustrates year-by-year succession rates and examines specific aspects of the succession phenomenon, including the influence on firm performance on succession and the characteristics of departing and incoming CEOs.
Part II: CEO Succession Practices (2011) details where boards assign responsibilities on leadership development, the role performed within the board by the retired CEO, and the extent of the disclosure to shareholders on these matters. For ease of reference, data is categorized based on industry groups, company size, and financial performance.
Part III: Notable Cases of CEO Succession (2011) includes summaries of 10 episodes of CEO succession that made headlines in the past year that were carefully chosen to highlight key circumstances surrounding each transition.
Part IV: Shareholder Activism on CEO Succession Planning (2011) reviews examples of responses by companies that have recently received shareholder proposals in this area.
The report ends with an Appendix featuring The Conference Board Roadmap to CEO Succession Planning—a series of practical steps to make it all happen.
Source: The Conference Board