CEO succession planning is a key process that ensures the smooth transition of leadership within an organization. It involves identifying and developing potential top executive successors and safeguarding the company's long-term success. With the ever-increasing complexity of today's business landscape, effective CEO succession planning has become more important than ever. This process mitigates risks associated with sudden leadership changes and provides stability, continuity, and strategic direction to the organization.
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This article will explore 11 key facts about CEO succession planning that shed light on its significance and best practices. From understanding the role of boards and stakeholders to recognizing the impact of a well-executed succession plan on organizational performance, these facts will provide valuable insights for aspiring leaders and organizations seeking to enhance their succession planning strategies.
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- According to a meta-analysis of 60 studies from 1972 to 2013 involving 13,578 CEO successions, it was found that CEO succession negatively influences short-term performance. However, there is no significant direct influence on long-term performance.
- A National Association of Corporate Directors study shows that 66% of US public and private companies openly acknowledge failing to establish a formal CEO succession plan.
- This study analyzes data from 3,320 CEO successions in Chinese companies on the Shanghai and Shenzhen Stock Exchanges from 1997 to 2010. The findings support the argument that male-to-female succession negatively affects firm performance and increases the likelihood of a successor's early departure.
- This study looks at how different factors affect a company's performance after a CEO (Chief Executive Officer) leaves and a new CEO takes over. The study focuses on three types of CEO successors: followers, contenders, and outsiders. The researchers found that the type of successor CEO and the turnover of other senior executives after the succession impact the company's return on assets (ROA). In other words, the company's performance can be influenced by who takes over as CEO and whether there are changes in other top-level positions. Additionally, the study found that there is a relationship between how long the departing CEO served and the company's ROA after the succession. Specifically, there is an inverted U-shaped relationship, meaning the company's ROA initially improves as the departing CEO's tenure increases. However, further increases in departing CEO tenure can hurt the company's performance after a certain point.
- In recent years, there has been a notable increase in the number of S&P 500 companies that hire external candidates when replacing their CEOs. A study conducted in 2020 found that 29% of these companies chose to bring in an outsider for the CEO position, which marks a significant rise from the 21% recorded in 2019.
- Dalton (1985) found that poorly performing companies are more likely to replace CEOs with outside successors.
- According to research, nearly half (47%) of executive transitions are considered failures. However, there is a way to significantly improve the chances of success by 25% - hiring internally.
- One analysis of CEO succession in the Russell 3000 found that the Utilities sector had the highest rate of CEO succession at 21.3 percent, and the Real Estate sector had the lowest rate of CEO succession at 7.4 percent.
- This study found that approximately 20% of successions resulted in a mishired CEO. This means that the CEO stayed in the position for less than three years or was fired due to performance issues, involvement in a scandal, or unethical behavior.
- The Conference Board found that only a small fraction of companies had a dedicated CEO succession committee. Instead, the responsibility for CEO succession was assigned differently among companies. Approximately 60% of companies assigned this responsibility to the full board of directors, while 21% assigned it to the nominating committee. Additionally, 15% assigned it to the compensation committee, and the remaining 4% assigned it to a dedicated succession committee or "other."
- Cziraki 2020 found that more than 80% of new CEOs are insiders, i.e., current or former employees or board members.
Related: Is Succession Planning Important?
CEO succession planning is a strategic imperative for organizations aiming to thrive in an ever-changing business landscape. Companies can ensure continuity, stability, and long-term success through careful selection, development, and leadership transition. The 11 facts explored in this article have shed light on the critical aspects of CEO succession planning, emphasizing the importance of proactive preparation, board involvement, and alignment with organizational goals.
Related: Global trends influencing succession planning