So it’s critical that companies have a plan in place to ensure that all constituents are comfortable with transition. If not, your bottom line could suffer.
“The reason routine retirements are more disruptive than assumed is that they’re not as routine as people might envision,” Alan Ellstrand, one of the management researchers who conducted the research, told CEO Briefing. “And in general, the company’s stock tends to react negatively.”
The researchers analyzed 572 CEO retirements and their effect on shareholder reactions at S&P 1500 firms from 2003 through 2012. The magnitude and direction of capital-market reactions to these events depended on the firm’s financial performance before the retirement, whether the successor came from within or outside the firm, whether the CEO was founder of the firm, and whether or not the retiring CEO was retained on the firm’s board of directors.
Even though these things are relatively anticipated, Ellstrand said, “since we’ve kind of gotten away from 65 years old as the mandatory retirement age, there is still some question about when a viable and well-functioning CEO is going to retire.”
So when it does happen, it can be seen as disruptive, particularly when that CEO has been performing well, he says, noting that investors don’t like uncertainty.
While, on average, shareholders reacted negatively to CEO retirement announcements, the researchers found that shareholders reacted more positively when a poorly performing CEO retired, preferring the fresh perspective brought about by hiring a successor outside the firm.
Founder-CEO retirements elicited the greatest negative reactions, but were more positive when the CEO was retained as a director.
Ellstrand said one challenge in the research was trying to tease out what was a real ‘retirement,’ given that early retirements might be suspicious and could be a firing, especially if the CEO was under 59 years old.
Also, Ellstrand noted, shareholder perceptions are heavily about the successor. If the successor is, for instance, a trusted COO, the transition can be fairly seamless. “But if you’re reaching for someone outside the organization, or maybe for one of three or four top VPs who are vying to take over, there is definitely going to be more of a transition and a little bit of disruption.”
In general, Ellstrand stressed, the study underscored the idea that “treating [CEO retirement announcements] as consequential corporate disclosures can only benefit a firm’s strategic management.”