NEW YORK, Oct. 19, 2016 /PRNewswire/ -- According to a new report by The Conference Board, the rate of succession of older CEOs of large U.S. public companies slowed significantly in 2015, bringing to a halt a generational shift in business leadership that had been observed since the financial crisis.
The report, CEO Succession Practices: 2016 Edition, annually documents and analyzes succession events of chief executives of S&P 500 companies. In 2015, there were 56 cases of S&P companies that underwent a CEO turnover.
Prior editions of the study had shown an acceleration of the succession rate of CEOs aged 64 or older following the so-called Great Recession of 2008. In the 2009-2014 period, in particular, their average turnover rate was 25.5 percent, compared to 8.1 percent for younger CEOs. However, in 2015, older CEOs departed at a rate of 15.1 percent, which is much more aligned with the average number for the 2001-2008 period.
"There are multiple possible explanations for this finding, including of course an improvement in firm performance and the overall economy," said Matteo Tonello, Vice President and Managing Director at The Conference Board, and a co-author of the report with Jason D. Schloetzer, Professor at the McDonough School of Business at Georgetown University. "But when you see older CEOs departing at a rate of 25 percent or higher for a number of years in a row, a slowdown becomes natural and signals the completion of a generational change process."
Another notable finding from the report is that, at least when it comes to business leadership, 2015 won't go down in history as the year when the glass ceiling was broken. A national party may have nominated its first female presidential candidate, but nearly all CEOs of large U.S. public companies are male and only one of the 56 top leadership positions that became available in the S&P 500 went to a woman. The highest share of incoming female CEOs, 18.2 percent, was seen in 2011, when 10 of the 55 cases of CEO succession resulted in the selection of a woman as chief executive. The 2015 percentage is the lowest reported by The Conference Board since 2009.
Appointment of Interim CEO Emerging as a More Common Practice
The report finds that the appointment of an interim CEO is emerging as a more common practice to navigate a succession event and reduce its possible unintended impact.
In 2015, approximately 10 percent of CEO succession events involved an interim appointment. The length of service for interim CEOs ranged from two to 10 months, with one board ultimately offering the permanent position to the executive who had served in the interim. According to Schloetzer, "Previously used in situations of a succession emergency, the appointment of an interim CEO does not necessarily reflect a poor succession planning process. Instead, boards might be turning to interim arrangements to support succession planning by auditioning a candidate directly on the job, allowing the board to take time to fully assess strategic circumstances before appointing a successor, and allowing investors to help shape the leadership transition."
According to the report, a desire for continuity - in both leadership and culture - may account for the continuing decline in the appointment of outsiders to the CEO role, accompanied by investment in internal development of leaders. Greater transparency surrounding succession, noted in last year's report, also continues. Corporate boards are more frequently providing shareholders with advance notice of a CEO succession event.
Key findings in the report:
-- In general, CEOs hold on longer to their jobs, confirming the reversal
of a decade-long trend of shorter tenures. In 2009, at the peak of the
financial crisis, the average CEO of an S&P 500 company held his or her
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, 9.9 in 2014, and 10.8 in 2015. The
finding for 2015 represents the longest CEO tenure reported by The
Conference Board since 2002 (two long-tenured CEOs who departed in 2015
after more than 30 years in office - Rupert Murdoch of media empire
21(st) Century Fox and Robert Skaggs, Jr. of utilities company NiSource
contributed to the results).
-- The US stock market fared well despite volatility and international
uncertainties, and disciplinary CEO departures kept near their lowest
levels since 2002. The analysis showed wide variation across the
2001-2015 period in the rate of CEO dismissals, which ranged from a low
of 13.2 percent in 2005 to a high of 40 percent in 2002 (on average,
23.6 percent for the whole time period). In 2015, disciplinary
successions remained low, with an average dismissal rate for the index
of 17 percent, or only slightly higher than what was reported in 2014.
As expected, there is empirical evidence of an inverse correlation
between the volume of disciplinary departures and stock market
performance. A rising tide lifts all boats and--despite the disturbance
and volatility caused by a stronger dollar, plunging oil prices, and
weak emerging markets--the lower CEO dismissal rate in the S&P 500 is,
at least in part, a function of the improving overall strength of US
equities and business fundamentals.
-- Despite other favorable circumstances, such as longer tenure and
declining succession rates, in 2015 poorly performing CEOs had a 33
percent higher probability of being replaced--a possible sign that the
emphasis on pay-for-performance is starting to show results. CEOs in the
bottom quartile by stock performance registered a CEO succession rate of
12.2 percent for 2015, which is nearly 33 percent higher than the 9.2
percent rate seen among CEOs in the top three quartiles (Chart 2). This
represents a notable increase from the 11.3 percent higher probability
of CEO succession that The Conference Board reported for poor performers
in 2014, and approaches the average rate of 13.7 percent that was found
for the bottom quartile in the 2002-2015 period. Over the years, the
succession rate of CEOs of better-performing companies fluctuated from
6.5 percent (in 2002) to 11.6 percent (in 2009)--for an average of 9.5
percent for the period covered by the study. The finding may reflect the
pressure that new regulations and shareholders are putting on listed
companies to introduce more rigorous metrics of long-term performance
and ensure the alignment of CEO compensation with such measurable
results.
-- The appointment of outsiders to the CEO role continues to decline amid
investment in internal leadership development programs and the
sensitivity to ensuring cultural continuity in case of succession. As
part of their effort to improve succession planning, companies continue
to invest in leadership development or opt for the experience of an
independent board member. In 2014, 85.7 percent of incoming CEOs were
"insiders" promoted to the CEO position after serving at least one year
with the company. The remaining 14.3 percent were "outsiders," having
served less than one year with the company. These findings represent a
clear break from the past, as corporate boards acknowledge the
importance of grooming senior talent and maintaining an insider list of
CEO-ready executives that won't disrupt existing organizational
practices and culture.
-- With shareholders and proxy advisors increasingly wary of CEO duality
models, the immediate appointment of the incoming CEO as board chairman
is seen only in rare circumstances. Only 10.7 percent of the successions
in 2015 involved immediate joint appointment as board chairman,
stabilizing around the 10 percent rate that The Conference Board
reported in the past two years. 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 assure 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 2015, nine of 10 companies that underwent a CEO
succession either had a board chairman already or appointed an outsider
to the role who met securities exchange independence standards.
-- Policies that permit retaining a departing CEO on the board are also
waning in popularity, as companies have become more sensitive to board
independence and wish to avoid 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,
with the largest percentage found in nonfinancial services.
-- In a significant shift from the past, the majority of public companies
now delegate CEO performance oversight to the compensation committee of
the board of directors. In manufacturing and nonfinancial services
companies, the once prevalent practice of involving the full board of
directors in the process for the evaluation of CEO performance continues
to lose 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 provide the most likely explanation
for this finding.
-- The largest financial companies show the highest rate of disclosure of
CEO succession planning, a finding that may stem from their effort to
strengthen a culture of risk oversight. Across industries and size
groups, less than half of nonfinancial companies include information on
succession planning in their annual disclosure to shareholders. Larger
companies are far more likely to include this type of information in
their proxy statement. In particular, disclosure has become a
predominant practice among the largest financial companies, and 83.3
percent of those with assets valued at US$10 billion and over regularly
have adopted the practice of updating their investors on this topic.
-- To control the narrative and prevent speculations on the reason behind
the change in leadership, corporate boards are more frequently providing
shareholders with advance notice of a CEO succession event. Of the
succession announcements among S&P 500 companies in 2015, 68.9 percent
preceded the time when the succession would become effective, continuing
a trend in which approximately seven out of 10 companies provide advance
notice of the upcoming transition.
CEO Succession Practices was made possible by a research grant from executive search and leading advisory firm Heidrick & Struggles. "In addition to the valuable and informative data it offers, this year's report analyzes notable succession events at a dozen S&P 500 companies, providing a concrete sense of the range and variations of CEO transitions," said Jeff Sanders, Vice Chairman at Heidrick & Struggles. "These cases suggest best practices and confirm the need for companies to develop their succession plans in light of the specific circumstances they face in the marketplace as an organization."
Source: CEO Succession Practices: 2016 Edition / The Conference Board
https://www.conference-board.org/csuite-succession
About The Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. www.conference-board.org
To enable peer comparisons among its member companies, The Conference Board offers a portfolio of benchmarking data and analysis on corporate governance, proxy voting, sustainability and citizenship. It can be accessed at www.conference-board.org/data/corporatebenchmarking
About The Conference Board Governance Center
Founded in 1993, the Governance Center draws upon authoritative research from The Conference Board. Our mission is to work in the public interest to provide knowledge and thought leadership on global corporate governance issues for boards and c-suite leaders, investors and other leading organizations.
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