In our study, The 2011 CEO Succession Report, which The Conference Board recently released, we document 2009-2010 succession events regarding the chief executive officer of S&P 500 companies and analyze those events in the historical context of the last two decades.
The report is organized in four parts.
Part I: CEO Succession Trends 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 the departing and incoming CEOs.
Part II: CEO Succession Practices 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.
Part III: Notable Cases of CEO Succession (2009-2010) includes summaries of 10 episodes of CEO succession that made headlines in the past two years and that were carefully chosen to highlight key circumstances of the process.
Part IV: Shareholder Activism on CEO Succession Planning (2010-2011) reviews examples of companies that have recently faced shareholder pressure in this area.
The following are the major findings illustrated and discussed in the report.
CEO succession rate. The rate of CEO succession in calendar year 2010 was 10.3 percent, consistent with the average number of annual succession announcements from 2000 through 2009. In 2010, 51 CEOs in the S&P 500 left their post.
Company performance as a determinant. The probability of CEO succession is higher following bad performance than following good performance. In the 2000–2010 period, the succession rate of CEOs of poorly performing companies ranged from 21 percent in 2002 to 10 percent in 2006 and 2009 (on average, 14 percent for the period covered), while the succession rate of CEOs of better performing companies varied from 7 percent in 2002 to 12 percent in 2009 (on average, 10 percent for the period covered).
CEO age as a determinant. The probability of CEO succession is higher for CEOs who are at least 64 years of age than for younger CEOs. In the 2000–2010 period, the succession rate of CEOs who are at least 64 years old ranged from 27 percent in 2005 to 9 percent in 2008 (on average, 17 percent over the period), while the succession rate of younger CEOs ranges from 9 percent in 2000 and 2001 to 13 percent in 2005 (on average, 10 percent over the period). The rate of CEO succession for younger CEOs is remarkably consistent across the sample.
Business industry as a determinant. Despite the assumption about industry dependability, the rate of CEO succession is rather consistent across all industry groups but one during the 10-year sample period. While companies in the services industries exhibit a succession rate of 13 percent, this rate is not statistically different from the mean rate of 11 percent. The extraction industry, which includes mining, petroleum, and natural gas companies, is the only sector to exhibit a succession rate (7 percent) that is statistically different from the mean.
Departing CEO age. Across the sample period, the average departing CEO was 60 years old. In 2010, the average age of the departing CEO in the S&P 500 was 61.
Departing CEO tenure. The average tenure of a departing CEO has declined from approximately 10 years in 2000 to 8 years in 2010.
Disciplinary and nondisciplinary departures. During the 2000–2010 period, there was a declining trend in CEO retirements. The rate of retiring CEOs ranged from 37 percent of all successions in 2004 to 16 percent of those reported in 2008 (on average, 26 percent for the period). The decline in successions of departing CEOs of common retirement age suggests a corresponding increase in the number of disciplinary successions. From 2006 through 2009, which is roughly the period of the financial crisis, approximately 80 percent of all succession events were associated with CEO dismissals. In more recent months, the rate of CEO retirements has increased.
Incoming CEO age. Across the sample period, the average incoming CEO was 52 years old. In 2010, in particular, the average age of the incoming CEO in the S&P 500 was 51.
Tenure-in-company of incoming CEO. Across the sample period, the average tenure-in-company of an insider promoted to CEO was 15 years. Approximately 35 percent of insider CEO appointments involved a “seasoned executive,” which, for the purposes of this study, is defined as an executive with tenure in the company exceeding 20 years.
Inside promotions and outside hires. In 2009 and 2010, 25 percent of successions involved an outsider CEO appointment, which is consistent with the upward trend in the hiring of outsiders that has been recorded in the last two decades.
Professional qualifications and skills. When announcing a transition, virtually all boards in the 2009–2010 sample emphasized the professional qualifications of the incoming CEO, often through a description of his or her professional career and educational background. In addition, leadership abilities (found in 57 percent of the press releases studied) and a focus on creating firm value for shareholders (48 percent) were frequently discussed. Strategic planning skills (34 percent), the incoming CEO’s global acumen (23 percent), and current or prior board experience with other firms (16 percent) were also emphasized.
Joint election as board chairman. Only 16 percent of the examined 2009–2010 successions involved the immediate joint appointment of an individual as CEO and chairman of the board of directors. Based on press release disclosures, 61 percent of departing CEO remained as board chairman for at least a brief transition period, typically until the next shareholder meeting.
Board oversight structure. Most of the companies did not have a dedicated, stand-alone committee of the board for CEO succession planning oversight. Instead, in around half of the companies, these activities were performed by the full board (55.2 percent of manufacturing companies and approximately 49 percent of both financial and nonfinancial services companies). Larger companies were more likely to assign succession planning oversight responsibilities to the compensation committee.
Frequency of review. In all industries and size groups, a majority of companies indicated that their boards review the CEO succession planning process at least annually.
CEO auditioning. The practice of auditioning the incoming CEO (i.e., the board of directors trains and tests an outside candidate through temporary assignments as chief operating officer or chief financial officer) remains marginal, though larger companies were more likely to use it than smaller ones.
Board retention of retiring CEO. Across industries, over a third of the respondents indicated that they either have a formal policy of this type or that it is common practice for the CEO to be invited to remain as a director for a short period. A total of 37 percent of companies in nonfinancial services report such an approach to CEO succession. While the invitation to stay as a board member is fairly consistent across revenue groups, larger companies were more likely to adopt it as a formal succession policy.
Access to management without board approval. Virtually all surveyed companies, with no significant differences across industries and revenue groups, confirmed that their board members have direct access to management below the CEO level without CEO approval.
Succession planning disclosure. In the financial sector, 39 percent of companies include information on CEO succession planning in their annual disclosure to shareholders. The number was significantly lower for manufacturing (14.7 percent) and nonfinancial services (18.3 percent). There is a direct correlation between disclosure practices and company size, as larger companies more likely to include this information in the annual report. However, the format (e.g., proxy statement, annual report, press release), the frequency (e.g., annually, when circumstances change), and the extent of the disclosure remain unclear.
Responsibility for succession announcement. The chairman of the board is the director who most frequently (70 percent of succession cases in 2009 and 2010) introduces the incoming CEO to the company’s stakeholders. In many instances, the chairman is also the departing CEO, which may create the appearance that the departing CEO himself is announcing the change in power. Perhaps to avoid this situation, the announcement was made by the lead independent director in 27 percent of cases and by the chairman of the governance or nominating committee in three percent of cases.
Succession effective date. Of the 2009-2010 succession announcements examined, 38 percent state that the transition in chief executive is effective immediately. Instead, 62 percent of companies provided stakeholders with advanced notice of a CEO succession. Of these companies, the mean (median) lead time to the succession event becoming effective is two (two) months. There is variation in the lead time provided to company stakeholders. Specifically, lead time to the CEO succession event becoming effective ranges from as few as two weeks to as long as six months notice.
Stated reasons for CEO departure. Of the 2009-2010 succession announcements examined, 46 percent state that the reason for a sitting CEO’s departure is due to his or her retirement plans. It is interesting to compare this data with the finding from an analysis of the 2009-2010 succession cases based on the assumption that the departure of a CEO who is at least 64 years old should be considered a retirement: under such analysis, only 27 percent of CEO departures fall into the retirement category. This comparison suggests the possibility that the stated reasons for sitting CEOs’ departure might be less than reliable. Of the remainder of the sample companies: 43 percent do not provide an explicit reason for the sitting CEO’s departure; seven percent indicate that the departing CEO resigned from the chief executive position, and four percent of companies indicate that the departure is due to health concerns.
Stated role of the board in CEO succession planning. Perhaps surprisingly, despite the findings on the board oversight and frequency of review of the CEO succession plan, only 39 percent of the companies examined that experienced a CEO succession in the 2009-2010 period explicitly announced that the incoming CEO was identified through the board’s succession planning process.
Director and management changes in conjunction with CEO succession. Of the 2009-2010 succession announcements examined, 70 percent indicate that the CEO change will be accompanied by other changes at the director or senior management level.