Does CEO Succession Planning Matter?
In short, yes it does! Research released this week from the IRRC Institute, and conducted by ValueEdge Advisors’ Senior Advisor Annalisa Barrett, finds that companies which provided more information to shareowners about their CEO succession plans subsequently had more successful CEO transitions.
The report (which can be found here) presents the findings of a study of disclosures made by companies which changed CEOs in 2012. Specifically, the study finds that 56% of the companies which had a successful CEO transition provided more robust disclosure regarding their CEO succession plan prior to their CEO change, while only 37% of the companies which had an unsuccessful CEO transition provided such disclosure.
Planning for CEO succession is one of the most important responsibilities of the board of directors, and – understandably – shareowners want to know that boards have a plan for both expected and unexpected CEO transitions. However, surprisingly few boards provide a description of their CEO succession plan in their proxy statements, and many provide no information at all. In fact, almost a quarter (24%) of the companies studied provided no discussion regarding CEO succession planning in three proxy statements filed prior to their 2012 CEO change.
Of course, boards do not want to disclose the names of the internal candidates that are being considered for the top job, or admit that they will have to look for their new CEO from outside the company. But that is not the information shareowners want. Shareowners want to know that the board has a plan in place, which committee is responsible – and accountable – for that plan, how often the plan is reviewed, and how the board is exposed to high-potential senior executives within the company to identify potential CEO candidates. However, among the companies studied, only:
Ø 16% provided a description of the role the entire board plays in the CEO succession planning process
Ø 10% disclosed how frequently the board reviews the CEO succession plan
Ø 8% mentioned the existence of an emergency succession plan
Ø 2% described the process used by the board to identify CEO candidates
Ø 2% discussed how the directors are exposed to senior leaders and high-potential executives within the company
This new research shows that companies which disclose this information to their shareowners are more likely to have successful CEO transitions. We call on boards to take notice and to provide shareowners the information they are seeking regarding CEO succession planning.