Examining companies within the top 2,500 that had CEO turnovers on or before Jan. 1 2014, they found that the median total shareholder return for ‘all’ turnovers fell to -3.5% in the year afterward. However, for forced turnovers, the median return fell to -13% in the year leading up to the CEO change and -0.6% in the year after, which means those companies lost up to $1.8 billion more than those with planned turnovers.
Companies can improve their succession process by having a stated plan and always looking ahead at the company’s needs, “not back at candidates’ track records,” the authors wrote.
Such plans should revolve around maintaining a strong internal pipeline, as high-performing companies with planned successions generally had more robust leadership pipelines and were more apt to hire their CEO from inside the company than were other companies, according to the report.
In contrast, the lowest-performing companies didn’t appear to have as strong a pipeline to call on. Over the past decade, 25% of their new CEOs had been outsiders and an additional 15% were interim leaders, compared with 21% and 10% at the top performers, respectively.
“Given the value implications, this is clearly a business issue that needs to be ‘owned’ by the top team instead of being relegated to HR,” an author wrote. He cited several steps that companies should take at the outset, including strong board participation in the succession planning process and talent development programs that reward high-performing employees.
In a video accompanying the report, another author said that boards should “think two CEOs ahead and not just one CEO ahead.” By the time the current leader is getting ready to retire options have already narrowed considerably, and “if that option pool is too small you’re stuck”—companies might have to seek less qualified candidates from the outside who are not as familiar with the organization’s unique challenges. Companies should also hire for the abilities they will need in the future as they grow, he says.
Talent development programs, they said, should include concrete steps for the top 50 talented employees to get “the right types of experience early,” such as giving them responsibility for entire business units and placing them in international assignments.
Companies need to make sure “the best leaders are put up against some really important challenges that developm them and also prove they have the skills to deal with some of the toughest challenges a company is facing,” he said.