In our study, CEO Succession Practices (2012 Edition), which The Conference Board recently released, we document and analyze 2011 cases of CEO turnover at S&P 500 companies. The study 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 the 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.
Part III: Notable Cases of CEO Succession (2011) 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 (2011) reviews examples of companies that have recently faced shareholder pressure in this area.
CEO succession rate The rate of CEO succession in calendar year 2011 was 10.8 percent, consistent with the average number of annual succession announcements from 2000 through 2010. In 2011, 55 CEOs in the S&P 500 left their post.
Company performance as a determinant The probability of CEO succession is higher following poor performance than following better 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). In 2011, the succession rate of CEOs of poorly performing companies was consistent with the prior trend at 13 percent. 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). In 2011, the succession rate of CEOs of poorly performing companies was 10 percent.
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 2000–2011 period, the succession rate of CEOs who are at least 64 years old ranged from 29 percent in 2011 to 9 percent in 2008 (on average, 18 percent over the period), while the succession rate of younger CEOs ranged from 8 percent in 2011 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 The rate of CEO succession is rather consistent across most industry groups during the 12-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-based products, and natural gas companies, is the only sector to exhibit a succession rate (8 percent) that is statistically different from the mean.
Departing CEO age Across the 2000–2011 sample period, the average departing CEO was 60 years old. In 2011, the average age of the departing CEO in the S&P 500 was 60.
Departing CEO tenure The average tenure of a departing CEO has declined from approximately 10 years in 2000 to 8 years in 2011.
Disciplinary and nondisciplinary departures The rate of CEO dismissals varies widely across the 2000–2011 period: rates range from 40 percent in 2002 to 16 percent in 2005 (on average, 28 percent for the period). Despite the varying trend, the rate of CEO dismissals for the 2000–2005 period (29 percent) and the rate for the 2006–2011 period (28 percent) are similar. Since 2008, which roughly coincides with the beginning of the financial crisis, 29 percent of all succession events were associated with CEO dismissals.
Incoming CEO age Across the sample period, the average incoming CEO was 53 years old. In 2011, in particular, the average age of the incoming CEO in the S&P 500 was 52. It is uncommon for a company to appoint an incoming CEO who is at least 62 years old―less than 5 percent of incoming CEOs fit this description.
Inside promotions and outside hires In 2011, 19 percent of successions involved an outsider CEO appointment, which is consistent with the continuing trend in the hiring of outsiders that has been recorded since the 1970s.
Tenure-in-company of insiders Across the sample period, the average tenure-in-company of an insider promoted to CEO was 15 years. In 2011, 32 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. The tendency to appoint a seasoned executive as incoming CEO is related to firm performance; only 7 percent of incoming CEOs in poor-performing companies were seasoned executives, compared with 43 percent of incoming CEOs in companies performing better.
Professional qualifications and skills When announcing a transition, nearly all of the 55 boards in the 2011 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 42 percent of the reviewed press releases containing succession announcements) and a focus on creating firm value for shareholders (42 percent) were frequently discussed. It appears that succession announcements tend to emphasize characteristics of the incoming CEO that are desireable, given the firm’s current position.
Joint election as board chairman Only 19 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.
Board oversight structure Few companies have a dedicated, stand-alone committee of the board for CEO succession planning oversight. Instead, approximately 50 percent of the examined sample of companies indicated that these activities were performed by the full board (44.3 percent of financial services companies and approximately 56 percent of both manufacturing 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 boards review the CEO succession planning process at least annually.
CEO auditioning Surveyed companies reported an infrequent use of CEO “audition” practices (i.e., the board of directors trains and tests an outside candidate through temporary assignments as chief operating officer or chief financial officer). However, larger companies were more likely to use it than smaller ones.
Mandatory CEO retirement policy A mandatory CEO retirement policy based on age is an unlikely element of CEO succession plans. Only 13 percent of manufacturing companies and 11 percent of nonfinancial services companies adopt an age-based mandatory retirement policy for CEOs; the percentage is lower in the financial sector. The highest level of policy adoption (20 percent) is reported by companies with assets of at least $100 billion.
Board retention of retiring CEO Across industries, the majority of surveyed companies indicated that they do not have a formal policy regulating the retention of retiring CEOs on the board. There is a clear direct correlation between the adoption of such policies and the size of the company, with as many as 60 percent of companies with assets of at least $100 billion requiring that the CEO leave the board as part of his or her succession plan.
Access to management without board approval Nearly 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 Approximately 27 percent of companies in the financial services industry included information on CEO succession planning in their annual disclosure to shareholders. The use of disclosure was lower for manufacturing (20 percent) and nonfinancial services (24 percent) companies. There is a direct correlation between disclosure practices and company size, as larger companies are more likely to include this information in the annual report: approximately 40 percent of respondents in the largest asset group indicated that they provide the disclosure. 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 (62 percent of the succession cases in 2011) introduced the incoming CEO to the company’s stakeholders. In 56 percent of these announcements, 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 29 percent of cases. The remaining succession announcements simply state that a new CEO has been appointed without further introduction from the board or departing CEO.
Succession effective date Of the 55 succession announcements among S&P 500 companies in 2011, 50 percent stated that the transition in chief executive is effective immediately, increasing from 38 percent in the 2009–2010 period. The remaining 50 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 months, although it ranged from as few as one week to as long as seven months’ notice.
Stated reasons for CEO departure Forty-four percent the 55 succession announcements among S&P 500 companies in 2011 linked the departure of the CEO to retirement. For comparison, if retirement is defined by departing CEO age (CEO age is at least 64 years), approximately 10 percent of CEO departures are due to “retirement.” This comparison highlights two possibilities: a number of departing CEOs retire before the age of 64, and/or the stated reasons for the departure in a company’s CEO succession announcement are less than reliable. Twenty percent of succession announcements linked the departure of the CEO to resignation. Twenty-two percent of succession announcements do not provide a reason for the CEO’s departure.
Stated role of the board in CEO succession planning Perhaps surprising, only 32 percent of the 55 succession announcements made in 2011 by S&P 500 companies explicitly stated that the incoming CEO was identified through the board’s succession planning process.
Director and management changes in conjunction with CEO succession Of the 55 succession announcements made in 2011 by S&P 500 companies, 50 percent indicated that the CEO change would be accompanied by additional changes at the director or senior management level.