HBR: Why CEOs Don’t Get Fired As Often as They Used To

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.

via {title} – HBR.