Well-executed CEO transition planning engages the organization's stakeholders early and consistently throughout the process
CEO transitions have always been challenging but never more so than in today's environment. We advise our clients to think of transition planning as a distinct process from succession planning that requires attention and thoughtful preparation. Your shareholder base, collectively, is a key stakeholder in the success of a public company CEO transition. The design of a successful CEO change must include shareholder perspectives and concerns.
To gain a sharper sense of the challenges posed by CEO turnovers, as well as the risks involved, Russell Reynolds Associates reviewed CEO tenure and incidents of CEO turnover at S&P 500 member companies from Jan. 1, 2003 to Dec. 31, 2015. Across these 500 companies, there were 688 CEO transitions during that 12-year period, with 40% of the firms experiencing two or more CEO transitions.
During that period, while the average departing S&P 500 CEO had a tenure of 5.9 years, a surprising number of CEOs departed quickly. Fully 13.1% of new CEOs left in less than three years, and 7.8% left within two years. Given the cost of and investment in CEO appointments, those are expensive misses. When looking only at external CEO appointments, the departure rates jump to 17.2% in less than three years and 11% within two years — a notable rate of failure. These are not untested leaders or unsophisticated enterprises. These failed appointments were the product of the succession and onboarding processes used by some of the world's largest and most successful companies.
The root causes for these departures varied. Russell Reynolds looked at each transition and its circumstances to determine if it was planned or unplanned. In our research, we considered a range of disparate factors, but a large number — more than 85% — seemed to result from ineffective CEO performance and forced board removal. Sometimes it was due to shareholder activism.
Any change in a company's chief executive introduces inherent risks to the company and its shareholders. Combined with a poorly planned transition process, those risks go unmitigated and can escalate quickly. A thoughtful CEO transition plan presents an opportunity to get the new CEO up to speed quickly and focused on issues that will enhance shareholder value.
A new CEO must quickly develop relationships with numerous key constituencies in an environment defined by uncertainty and anxiety. This is true even when the CEO is an internal successor; the company's strategic intent may remain largely unaltered, but style and expectations change from leader to leader. When well-executed, CEO transition planning engages the organization's stakeholders early and consistently throughout the process to actively alleviate potential areas of stress, allowing the top team to stay focused on the business and value creation.
Ideally, the formal transition process begins nine to 12 months in advance of the expected transition date. We have found that thorough transition plans generally consist of six phases but should be refined to fit the specific circumstances:
- Planning the transition and thinking about the details.
- Documenting and communicating the plan.
- Building relationships with the board.
- Sharing knowledge and cultural norms.
- Learning key stakeholders' objectives and concerns.
- Assessing the transition.
While each phase is critical, one that companies often underemphasize is mapping and building relationships with external investors. Companies should devote careful planning to building trust with important stakeholders like investors and regulators in advance of a CEO transition. This allows a natural and reassuring conversation to take place when a transition does occur. The largest institutional investors (e.g., BlackRock (BLK), State Street) expect robust CEO succession planning processes to begin years before a transition takes place.
Once a transition begins, the new CEO should not only meet with key internal stakeholders such as the board, but also with key external stakeholders — particularly members of the investment community — to develop a thorough appreciation of company issues and stakeholder concerns. Another key group that the CEO should build relationships are with state and federal regulators, when applicable. In certain highly regulated industries, relationships with regulators are of critical importance as they provide the company license to operate (e.g., utilities and financial services) or are their largest customers (e.g., health care and defense). We encourage new CEOs to engage large shareholders (asset managers, pension funds, etc.) directly to develop a robust understanding of their priorities.
We have found through our CEO succession planning work with clients that many of the internal succession candidates (other than the chief financial officer) have not had enough substantive interaction with the investor community. The incumbent CEO can play an important role in this process by personally introducing the new leader to key stakeholders and helping the new leader create — or redefine — his or her reputation in the market.
Ideally, the likely CEO successor (if internal) should have increased visibility and interaction with investors beginning about a year ahead of the expected transition. This can be complicated when there are multiple internal candidates — and impossible with external candidates. We have seen some companies have success engaging an outside party or using the internal investor relations function to conduct interviews with investors to better understand investor priorities for a new CEO. The summarized results can then prepare the new leader for future stakeholder meetings. The interviews can also serve as a vehicle for conveying key messages to these constituents — among the most important being that the new leader listens to and values outside perspectives.
CEO transitions need to be inclusive of key stakeholders: the board, employees, regulators and investors. A deliberate approach can accelerate value creation and increase the confidence in the enterprise by key stakeholders, particularly its shareholders.
Jack "Rusty" O'Kelley III is the New York-based global leader of the board consulting and effectiveness practice at executive search and leadership consulting firm Russell Reynolds Associates. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.