CEO Succession — What’s it Worth?
Every year I look forward to what was once Booz’s CEO succession research but now under the name Strategy& because they always tackle a different angle of this daunting and tricky transition period. This year, in their 15th edition, they wisely calculated the cost of a poor CEO transition which should leave many boards shaking in their boots. If a company has done it right and not gone through a forced succession, large companies would have generated an average of $112 billion more in market value in the year prior and after the CEO changing of the guard. As the authors say, that’s a whole lot of money! Even with planning for a transition, companies’ financial performance suffers. All of this is to say that CEO turnover under the best and worst circumstances is pricey.
Strategy& also described the hidden costs that many companies do not think about when calculating the price tag of CEO succession. The authors mention the visible costs of a departing CEO’s severance package and a retainer fee to the executive search firm hired to identify or vet a new CEO. In addition, the price tag includes the sudden travel of board members to attend a last minute meeting if a CEO is let go and the cost of other professionals such as communications consultants, employment lawyers, relocation experts, etc. But then they also cite the invisible and truly dramatic costs to an organization such as uncertainty in the workforce, slowdowns on growth initiatives and potential deals in the pipeline, an exodus of top talent and simply speaking, the overall paralysis of the enterprise.
In this very comprehensive research, several other factors stood out:
- There’s been a steady increase in planned successions, up to 78% in 2014
- A decrease in forced turnovers, only 13% in 2014 (a new low)
- CEOs having international experience, 33% of their sample of incoming CEOs had some which the authors believe will grow in importance in the future
- Top performing companies had planned successions 79% of the time and 79% of their CEOs were insider CEOs (insider CEOs tend to deliver better performance than outsider CEOs and have longer tenures)
- The number of incoming CEOs who also hold the chairman title is at its lowest proportion — 10% (it is not considered a best practice for new CEOs to be given the chairman title when they start their tenure)
I was glad that the “female” question came up in their analysis. In their incoming group of CEOs for this year’s analysis, women made up 5% of CEOs compared to 3% in 2013. Sounds like progress, yep? Not really! The disturbing fact is that they found that women CEOs are more likely to be outsiders (an average of 33% for women vs. 22% for men, over the 11 years they’ve tracked the gender issue) and are more likely to be forced out (32% for women vs. 25% for men). Not so good. Clearly, women face a host of issues when they become CEOs but the odds are not exactly in their favor.