NEW YORK, Dec. 10, 2020 /PRNewswire/ -- Once the economic fallout from COVID-19 began, CEO turnover in the Russell 3000 began seeing a marked slowdown as boards opted for continuity. For this reason, 2020 could shape up as a record-low year for CEO turnover.
These findings and more are from a report detailing trends in CEO succession, produced by The Conference Board with ESG data analytics firm ESGAUGE and supported by global executive search and leadership advisory firm Heidrick & Struggles. The analysis also reveals a key obstacle to greater gender diversity: While women CEO appointments are rising, so are women CEO departures.
The study features data on CEO succession announcements made in the Russell 3000 in the first half of 2020. It also details CEO succession announcements at Russell 3000 and S&P 500 companies in 2019 and, for the S&P 500, the previous 18 years. Findings from the new report include:
During this pandemic, the number of CEO successions have slowed. A steadying of the ship is the dominant trend.
- In Q2 2020, Russell 3000 companies counted only 71 CEO succession announcements—a decline of 11.3 percent from the average number of 80 CEO turnovers reported in the second quarters of 2018 and 2019.
- If the 11.3 percent decline in Q2 2020 continued in the second half of 2020, the succession rate for all of 2020 would be 7.8 percent – a record-low year for CEO successions.
"CEO succession is one of the most consequential events a company may face, with possible profound effects on its strategy, its organizational culture, and its relationship with investors and other stakeholders," said Matteo Tonello, Managing Director of ESG Research at The Conference Board and a co-author of the study. "Therefore, it is not entirely surprising to find that, when the COVID-19 crisis suddenly disrupted business activities in the United States, some companies chose to avoid compounding existing business risks with the inevitable uncertainties of a leadership turnover."
Interim CEO appointments have declined. Boards are looking to provide certainty by opting for permanent appointments.
- First half of 2020: The rate of interim CEO appointments in the first half of 2020 was 18.1 percent. In 2018 and 2019, however, the average annual rate was 21.4 percent.
Jason Schloetzer, Professor at Georgetown University's McDonough School of business, noted that the "decline in interim CEO appointments reveals boards' preference for a permanent CEO with a strong leadership mandate, at a time when the workforce and the market want reassurance about the direction of the company."
"As companies navigate the current uncertainty, stable leadership proved to be a top priority and, understandably, led to lower turnover rates with CEOs," stated Jeff Sanders, Vice Chairman and Co-Managing Partner of the CEO & Board Practice, Heidrick & Struggles, and a co-author of the study. "Past crises have revealed that when stability returns, CEO turnover will increase, and the market for CEOs will become more competitive. We are seeing many forward-thinking companies place an additional emphasis on developing and retaining their highest performing internal leaders while getting to know the best external leaders in their sector."
The gender diversity dilemma: Female CEO appointments are rising, but so are female CEO departures.
- Incoming female CEOs in the Russell 3000: 8.2 percent of incoming CEOs were women in 2019. That is an increase of 8 percent from 2018.
- Departing female CEOs in the Russell 3000: Unfortunately, the rise in incoming female CEOs (8.2 percent) was countered by a rise in departing female CEOs (6.2 percent).
- Rising departure rate: That departure rate of 6.2 percent is higher than women's 4.1 percent rate in 2018 and 3 percent rate in 2017.
"This year's numbers seem to reveal a theme of mixed messages on gender diversity," said Bonnie Gwin, Vice Chairman and Co-Managing Partner of the CEO & Board Practice, Heidrick & Struggles, and a co-author of the study. "As companies think beyond the current moment and plan for a post-pandemic world, the focus will be on, not only recruiting diverse and innovative talent, but also retaining them. Now is the time to develop female leaders at every level to ensure the next wave of talent represents the future demand for gender diversity in the marketplace."
Industries with the highest rates of CEO succession: consumer staples and utilities companies.
- Average across industries: In the Russell 3000, the average 2019 rate of CEO succession was 9.4 percent for better-performing companies and 19.4 percent for worse-performing companies.
- Consumer staples and utilities CEOs under the most scrutiny: The worse-performing consumer staples and utilities companies reported significantly higher rates of CEO succession (40 and 75 percent, respectively).
- For this analysis, performance is defined as the two-year total shareholder return (TSR) minus the two-year TSR of all index companies in the same industry: "better-performing" companies' industry-adjusted TSR falls in the top three quartiles for the index; "worse-performing" companies' industry-adjusted TSR falls in the bottom quartile for the index.
Bad behavior firings plummet.
- In the Russell 3000, forced departures due to personal misconduct declined from 44.8 percent of the total number in 2018 to 11.1 percent in 2019. And during that time in the S&P 500, they dropped from 54.5 percent to 20 percent.
"Disappointing though it was to see such a large proportion of forced CEO departures in 2018 being due to personal misconduct, it is now heartening to see that in 2019 there has been such a dramatic decline in those kinds of departures," said Paul Hodgson, Senior Advisor at ESGAUGE.
The average tenure of departing CEOs in both indexes has dropped significantly in the past few years.
- In the S&P 500, the average tenure of departing CEOs was 7.8 years, the lowest since 2010 and down from 10.8 years in 2015; in the Russell 3000 it was 6.9 years, down from 9.3 years in 2017.
- The average tenure of sitting CEOs has also shown a gradual decline: in the S&P 500 to 6.1 years from 6.3 years in 2017; and in the Russell 3000 to 6.8 years from 7.0 years in 2017.
"While 2020 may have granted CEOs a temporary reprieve, we expect CEO tenure to continue to shorten, driven by investor expectations and the accelerating pace of industry change that propels shifts in strategy and turnover in the corner office," said Paul Washington, Executive Director of The Conference Board ESG Center. "Boards that want to buck this trend can use the annual performance review process to set goals and coach their CEOs in developing skills and knowledge they need to lead in a fast-moving, stakeholder-focused environment."
About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org
About Heidrick & Struggles
Heidrick & Struggles (Nasdaq: HSII) serves the senior-level talent and leadership needs of the world's top organizations as a trusted advisor across executive search, leadership assessment and development, organization and team effectiveness, and culture shaping services. Heidrick & Struggles pioneered the profession of executive search more than 60 years ago. Today, the firm provides integrated leadership solutions to help our clients change the world, one leadership team at a time.® www.heidrick.com
ESGAUGE is a data mining and analytics firm uniquely designed for the corporate practitioner and the professional service firm seeking customized information on U.S. public companies. It focuses on disclosure of environmental, social, and governance (ESG) practices such as executive and director compensation, board practices, CEO and NEO profiles, proxy voting and shareholder activism, and CSR/sustainability disclosure. Our clients include business corporations, asset management firms, compensation consultants, law firms, accounting and audit firms, and investment companies. We also partner on research projects with think tanks, academic institutions, and the media. www.esgauge.com
SOURCE The Conference Board