NEW YORK, April 9, 2014 /PRNewswire/ -- In 2013, the percentage of S&P 500 companies that fired their CEO was the lowest since 2010, according to the 2014 edition of CEO Succession Practices, a report released today by The Conference Board. The study reveals that only 23.8 percent of all CEO turnover events reported last year by companies in the index were due to dismissal, compared to the 24 percent recorded in 2010 and 25.5 percent in 2011. As a result, CEO tenure grew in 2013 to 9.7 years, reversing a decade-long declining trend. While improved overall financial performance is the most likely explanation, this finding is also indicative of the regained trust in business progressively shown by investors after the financial market crash of 2008.
"Our research shows that, following years of exceptional scrutiny of CEO performance, the witch hunt is over and senior management is finally getting a break. It is happening because the stock market has been faring so well, shareholders are happy and directors feel less pressure to bring change quickly and at all costs," says Matteo Tonello, managing director of corporate leadership at The Conference Board and coauthor of the report with Jason Schloetzer, assistant professor at the McDonough School of Business at Georgetown University, and Melissa Aguilar, a researcher in the corporate leadership department at The Conference Board. "On many levels, this is welcoming news, as it means that the relationship between boards and CEOs is relieved of the tension it suffered during the long years of the financial crisis. But we are concerned about the false sense of security that may lead boards to reduce their commitment to succession planning and leadership development. The next crisis could be around the corner, the market won't always be bullish and CEO performance should anyway be about much more than stock prices. Being prepared for a change of leadership should always be a top priority for directors, irrespective of the confidence in the moment."
CEO Succession Practices, which The Conference Board updates annually, documents CEO turnover events at S&P 500 companies. The new edition contains a historical comparison of 2013 CEO successions with data dating back to 2000. In addition to analyzing the correlation between CEO succession and company performance, the report discusses age, tenure, and the professional qualifications of incoming and departing CEOs. It also describes succession planning practices (including the adoption rate of mandatory CEO retirement policies and the frequency of performance evaluations), based on findings from a survey of general counsel and corporate secretaries at more than 150 U.S. public companies. An Appendix to the report provides detailed recommendations to boards of directors overseeing the succession planning process.
"The report also highlights how CEO succession events often cause sweeping change within the senior management team," adds Professor Schloetzer. "Nearly one-quarter of succession events involve a change at the director or senior executive level, suggesting that boards would be wise to view succession planning as an initiative that reaches beyond the CEO."
Following are some of the key findings described in the 2014 edition of the report. To access the report, visit www.conference-board.org/CEOSuccession2014.
- The number of companies in the S&P 500 that also elected their new CEO as chairman of the board of directors was down significantly in 2013. Only 9.5 percent of the CEO successions at S&P 500 companies in 2013 involved the immediate joint appointment of the CEO as board chairman, down from 18.8 percent in 2012, and 19.2 percent in 2011. This trend is likely a result of the move in recent years by many large companies to separate their chairman and CEO roles. However, it is unclear whether the split roles persist, since many chairmen are the departing CEOs who typically exit the firm within one fiscal year.
- Most departing CEOs remained as board chairman for at least a brief transition period. Based on a review of 2013 succession announcements, 52.4 percent of departing CEOs remained as board chairman for at least a brief transition period, typically until the next shareholder meeting. This rate is higher than the approximately 33 percent rate reported in 2012.
- While employee tenure across the labor market has stayed relatively stable, the average tenure of a departing CEO has declined. The average tenure of a departing S&P 500 company CEO has decreased in recent years, from approximately 10 years in 2000 to 8.1 years in 2012. In contrast, employee tenure across the broader labor market has remained relatively stable during the past 25 years, averaging 5.1 years in 2008, compared with 5.0 years in 1983. The year 2013 was an outlier, with an average departing CEO tenure of 9.7 years—the longest since 2002, presumably due to CEO retirements that were delayed for economic considerations during recent global economic turmoil. The general decline in average departing CEO tenure recorded until 2013 could be due to several factors. The pressure of serving as the CEO of a large company in an increasingly competitive global marketplace could contribute to voluntarily shorter tenures; the increasing presence of private-equity firms has created new employment opportunities for CEO-level talent; and increased director independence and increased shareholder scrutiny might make boards more inclined to dismiss CEOs who perform below expectations.
- The overall upward trend of outsider promotions continued through 2012, although the rate of outside appointments has stabilized in recent years. The upward trend recorded since the 1970s in the appointment of "outsiders" (those who had served less than one year with the company) to the CEO role continues, but the momentum has slowed. In 2013, 23.8 percent of incoming CEOs were brought in from outside the company, a modest decrease from the 27.1 percent rate in 2012. The remaining 76.2 percent of incoming CEOs in 2013 were "insiders," or senior executives promoted to the CEO position after serving at least one year with the company.
The report features case studies from notable 2013 CEO turnover events, including General Motors and Wal-Mart (two cases of insider promotion), J.C. Penney (a case of departure due to poor performance), Procter & Gamble (a case of sudden retirement), PetSmart (where the retirement was planned and announced early), and Time Warner Cable (a case of CEO apprenticeship). A discussion of shareholder activism on CEO succession planning at Google and Sirius XM Holdings is also included.
The publication of the report was possible thanks to the generous support of Heidrick & Struggles.
Source: CEO Succession Practices: 2014 Edition, Report # R-1544-14-RR, The Conference Board
About the Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org
SOURCE The Conference Board