Eight percent of CEO successions in the U.S. face assignment of an interim CEO.
Most recently, for example, Intel Corp. CEO Brian Krzanich resigned on June 20 for violating the company's non-fraternization policy. Acting swiftly, the board appointed Robert Swan, the company's CFO, as interim CEO. This is a classic example of a company facing a corporate governance crisis where there is likely no succession plan in place. A quick look at the Intel board of directors reveals the median tenure is only 1.3 years, with the majority of the board members having been appointed after 2016. Interestingly, three directors with long tenures (an average of 21 years) left the board in May. Intel has embraced the separation of CEO and board chair roles.
In today's world where investors increasingly are paying attention to environmental, social and governance factors and how ESG impacts their investments, CEO succession is one area of governance worth paying closer attention to. The reality is that interim CEO successions lead to worse financial performance than permanent CEO successions. This is explained by the limited managerial discretion interim CEOs possess, and the fact that disruptive events can lead to politicization of the management process. Interestingly, a paper titled "The Impact of CEO Turnover on Firm Performance Around Interim Successions" published in the Journal of Management and Governance, confirms that companies using an interim CEO have lower performance than their counterparts, presumably, those that have permanent CEOs, nevertheless suggesting the underperformance is driven by voluntary turnover interim appointments. It also notes "the lack of succession planning seems to be driving the poor performance immediately following the voluntary turnover."
To go a step further, we have analyzed board characteristics of firms appointing interim CEOs. Our research and findings indicate that, in many cases, there already were signs of poor corporate governance before these appointments were made. Specifically, such boards have shorter tenure, lower connectedness to outside networks and chairs who do not hold the CEO title. We associate this evidence with low management quality, fewer permanent CEO candidates and possibly turmoil. We believe these observable characteristics are related to the lack of succession planning, which in turn results in the appointment of an interim CEO.