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2015-06-16 06:03:21
Per-Ola Karlsson
June 15, 2015
The number of chief executive officers who were dismissed from their jobs at
large global companies fell to a record low last year. At first glance that
might suggest complacency on the part of boards of directors, but it s actually
good news about corporate governance in general and CEO succession planning in
particular. It means that boards are doing a better job of choosing top leaders
far better than they were doing a decade ago. Data for the world s largest
2,500 companies also suggests that better CEO succession practices are
converging around the world, as regional differences in CEO succession rates
have narrowed sharply in recent years.
The reduction in forced successions indicates that boards of directors have
become significantly more practiced at selecting the right chief executives,
and planning and executing smoother transitions from one to the next. From 2000
to 2008, the average number of planned successions as a percent of turnover
events per year (excluding turnover events resulting from M&A) was only 63%.
But from 2009 onward, the percentage of planned successions has steadily
increased, to a record 86% in 2014. Forced turnovers have become much less
common. In 2004, for example, 37% of departing CEOs were forced out, but in
2014, that figure had fallen to 14%.
W150608_KARLSSON_FEWERCEOS
One reason for this improvement may be the increased focus on corporate
governance over the 2000-2014 period, starting with the enactment of the
Sarbanes-Oxley Act in the U.S. in 2002, as well as significant corporate
governance reforms in the U.K. and the European Union. Momentum for increased
transparency in governance and for better-qualified and more independent
directors has continued to the present, as has the convergence of governance
standards. At the same time, increased regulation has also heightened
compliance risks for companies and their directors, underscoring their duty to
choose senior leaders carefully. The rise of activist investors, which
challenge boards at companies where shareholder returns are lagging, may also
be a factor.
But a more fundamental reason for better CEO succession practices is that
directors and senior corporate leaders are learning from the mistakes of the
past. It has become increasingly clear that unplanned CEO changes which are
evidence of underlying problems with CEO succession practices are bad for
corporate performance and are very costly to shareholders. We quantified these
costs in Strategy& s annual Study of CEOs, Governance, and Success, which
estimated that companies that fire their CEOs forgo an average $1.8 billion in
shareholder value compared with companies that have planned successions.
If a failed CEO succession is so costly, then how does it happen? We found that
failed successions are typically a result of boards not paying close enough
attention to the senior leadership pipeline. Instead, they ve often delegated
the job of finding a replacement to the incumbent CEO. Boards at companies that
have to fire their CEOs also tend to rely overly on candidates track records,
effectively making their choices based on what worked in the past rather than
on what will work in the future.
We ve also seen global CEO succession rates converge in recent years, as the
exhibit below shows. In 2004, the global rate of successions at the world s
2500 largest companies was 14.7%, and the spread between the lowest regional
rate (North America, at 12.8%) and the highest (the BRIC countries, 23.9%) was
more than 11 percentage points. In 2014, the global rate of successions was
slightly lower, at 14.3%, but the spread between the highest (Other Emerging
countries, 15.9%) and the lowest (North America, 13.2%) had fallen to less than
three points.
W150608_KARLSSON_AROUNDTHEWORLD
It is a similar story with regional rates of planned successions. In 2004, the
global rate was 7.7% for all companies, with a spread of more than 15
percentage points between the highest and lower regional rates. In 2014, the
global rate had risen to 11.2%, and the spread between the highest and lowest
regional rates was only 5.1 points.
The fact that succession rates are more universally aligned is a sign of
continued globalization. Governance practices have been converging steadily
since 2000, capital has become increasingly mobile, and senior leaders at the
largest corporations find themselves, more and more, facing the same kinds of
challenges and opportunities no matter where they are headquartered or where
they do business. In addition, we hypothesize that the benefits of better
succession planning are becomingly increasingly well understood worldwide.
The long-term improvement in CEO succession practices and the global
convergence we have seen has benefited shareholders, and there is room for
significant further improvement. We estimate that if the world s 2,500 largest
companies continue the trend toward more planned CEO changes to the point
that they reduce the share of forced turnovers to 10% from the average of 18%
over the last three years they could collectively generate an additional $60
billion in shareholder value.
Per-Ola Karlsson is a senior partner at Strategy&, part of the PwC network. His
main areas of expertise are strategy formulation, organizational development,
corporate center design, and governance. In addition, he frequently supports
companies in the areas of change management and people capabilities.