Only 25 years ago, the succession of a public company's chief executive was just another traditional vanilla responsibility for the board of directors. In many cases, larger companies would have “emergency” CEO succession plans in place in the case of a long-term illness or sudden death. These used to be called the “executive gets hit by a bus” succession plan.

However, the rash of accounting scandals in the late 1990s and early 2000s followed by the financial crisis of 2008–2009 led to a new focus on CEO succession planning. Although many executives (save Enron's MCI WorldCom's leadership) were not prosecuted, the number of CEO turnovers skyrocketed from 1999 to 2009.¹

In the 1990s, roughly 5 percent of CEOs would be replaced annually, and the average tenure of a sitting CEO was nine years. From 2006 to 2009, the average CEO turnover rate rose to 15 percent a year and the average tenure dropped to 4.8 years.²

The Conference Board study, CEO Succession Practices: 2018 Edition, developed in collaboration with Heidrick & Struggles, annually documents and analyzes chief executive officer succession events of S&P 500 companies, updating a historical database first introduced in 2000. In 2017, there were 54 CEO succession cases among S&P 500 companies.

In 2009, at the peak of the Great Recession, the typical CEO of an S&P 500 held his or her position for 7.2 years—the shortest average tenure ever reported by The Conference Board. However, CEO tenure started to rebound soon after, rising to 10.8 years by 2015. In 2017, departing CEO tenure was the highest recorded since 2002, at nearly 11 years. Consistent with this evidence, in 2017 the average age of a sitting S&P 500 CEO was 58.3 years, more than two years older than the average CEO in 2009.

“Having and supporting the right CEO, I believe, is one of the highest priorities of a board,” Arnold Pinkston, a sitting director, said in a 2017 interview with The Conference Board. “That priority includes preparing for succession, both an orderly, over-time succession, and an emergency succession. As with the strategy, the CEO succession plans should be directly discussed, expressly agreed, and revisited at least annually—more if the circumstances warrant.”

Recent Trends

Cut to 2018—one year after the number of CEO departures decreased for the first time in three years. The revolving door at top public companies is swinging more than it has since 2014. A good number of those resignations and retirements came on the heels of major business failures. From 2009 to 2018, there was a mix of frauds (Wells Fargo's alleged fake bank account cross-selling strategy, Mylan NV's alleged defrauding of Medicare, Volkswagen automobile emissions scandal) and even a larger rash of business failures (Equifax's massive data breach, General Electric's fall from grace after an activist revealed major strategic shortcomings, Wynn Resorts founder's #MeToo moment).

A total of 149 CEOs left their posts in October 2018, virtually unchanged from the 148 recorded in September. October's total is well above the average 98 CEOs who have left their posts in October since 2002.³ October 2018's total is 41.9 percent higher than the 105 CEOs who left their posts in October 2017. As for year-to-date ending October 2018, 1,176 CEO changes were recorded, 21.1 percent higher than the 971 CEOs who left through October last year. The year 2018's total is 1.4 percent higher than the 1,160 CEOs who left their posts during the entirety of last year. The 10-month total is the highest since 2008, when 1,257 CEOs left their posts.

There are mixed reasons for such an increase. The Conference Board cites the increase in the number of CEOs reaching retirement age, the shifting consumer demand away from retail department stores and toward online shopping, and disruptive competitors who have outperformed traditional companies, leading to a need for external CEO candidates to breathe new life into a company.

At the same time, corporate directors have become more attuned to the importance of CEO succession planning in today's volatile business environment. Directors who attended a roundtable on the job description of a corporate director held by The Conference Board agreed that there has to be a regular process the board and management stick to over several years and that it needs to go beyond just the CEO.⁴

It is a time-consuming process in which board members must reevaluate strategic objectives; assess the interplay among skills, personalities, and organizational culture; motivate employees; and inspire investors—all while seeking the full collaboration of the existing chief executive. Failure to carefully plan the next leadership transition can have disastrous consequences for the company and undermine its reputation and credibility.

“CEO succession planning is among the most challenging tasks required of the board of directors, with important implications on the organization, its employees, and culture,” said Matteo Tonello, managing director of Corporate Leadership at The Conference Board and a coauthor of the report with Jason D. Schloetzer, professor at Georgetown University's McDonough School of Business. “Our findings suggest that a new generational change in the top business leadership may be underway. Boards of directors should therefore be aware of the possible increase in demand for top talent and have a sound CEO succession plan in place to retain a competitive advantage over their peers.”

Challenger, Gray & Christmas had another take. “There are a couple of explanations for the increased CEO changes that may not be directly related to a healthy economy facilitating movement among the C-suite,” the global outplacement consultancy and executive coaching firm said in an October 2018 press release. “It could also be due to economic uncertainty, as happened in 2008, and boards wanting to get someone in place who is capable of leading through a downturn. The other possibility for the increase is that companies want to be more transparent in light of movements such as #MeToo, and are willing to let go of leaders that do not fit their culture or otherwise act unethically.”

The majority of CEOs (317) who have stepped down in 2017 retired while another 215 resigned. Another 114 found new positions in other companies. However, 16 CEOs left amid scandal, six of whom were accused of sexual impropriety, 19 CEOs were terminated by the board, and seven left amid legal trouble.

Three trends have developed in the area of CEO succession planning: crisis management CEO replacement, the traditional long-term planning and mentorship, and gender diversity planning.

Crisis Management CEO Replacement

The so-called “emergency” CEO successions, which tend to grab the headlines of the financial publications, continue to be the most problematic for many S&P 500 and Russell 3000 companies. Due to the increase in business failures (i.e., fraud, sexual harassment, poor performance), the use of emergency CEO successors has led to a proliferation of interim CEOs. In 2016 and 2015, approximately 10 percent of CEO succession events involved an interim appointment; this rate increased to 18.5 percent in 2017.⁵ The length of service for interim CEOs ranged from one month to eight months, with four boards ultimately offering the permanent position to the executive who had served in the short term. Often characterized as used only in situations of emergency, the practice is increasingly being viewed as a more regular practice.

Some of the reasons a growing number of companies have been unprepared when they are faced with an emergency CEO replacement is that some boards are reticent to broach the subject early in a CEO's tenure, some look at the action more as a one-off practice instead of being part of the development and performance assessment of the CEO and management candidates, and a large number of directors believe their CEO succession planning process needs to be improved.

Some directors are reluctant to raise the topic of succession planning especially when they have a powerful CEO who has the company performing well. For those same directors, they find it difficult to broach the subject for fear of “rocking the boat” and upsetting the sitting CEO.

As for the CEO succession planning process itself, some boards have relied on the sitting CEO to take the lead in coming up with successor candidates. Studies and reports by The Conference Board, SpencerStuart, and the NACD have found that philosophy doesn't work.

In fact, The Conference Board found that smaller companies continue to lag behind in CEO succession planning, too often placing it on board agendas only when an emergency arises. Across industries and in all but one size group, at least half of the surveyed companies reported that their boards review the CEO succession plan on an annual basis. Of corporate boards in the nonfinancial services sector, 2.3 percent review the plan less frequently than once a year. The manufacturing sector shows the lowest percentage of cases in which the review is conducted more frequently than annually (21.6 percent, compared to 30.8 percent in financial services and 27.3 in nonfinancial services).

According to the NACD's 2018 whitepaper on CEO succession planning,⁶ 58 percent of public company directors surveyed in 2017 said they believe improvements to their CEO succession planning process was important or very important over the next 12 months. That was a substantial increase over the 47 percent of directors surveyed in 2016.

Wait too long to begin the succession planning process and there may not be enough time to address the developmental needs of candidates with potential. Starting early also allows directors to have more interactions with potential candidates over time, so they can observe patterns of performance and behavior and gain deeper insights into candidates' succession-readiness. Finally, when C-suite succession is an established process—rather than a response to an imminent transition—it can reduce the chances that succession planning will culminate in an intense and potentially disruptive horserace or the need for a CEO search.

In addition to emphasizing their commitment to management development and providing internal options for the board to consider on a long-term basis, CEOs also should encourage the board to plan for emergency succession needs, which can arise from a variety of circumstances.

A related finding from the research study is the dramatic widening of the gap between CEO exits from better-performing companies and underperforming ones. The succession rate of better-performing companies declined to 6.8 percent in 2017, the lowest since 2002 and much lower than the average of 9.4 percent calculated for the entire 2001–2017 period. By way of comparison, in 2017 the succession rate for better-performing companies was more than three times lower than the 22.1 percent registered for underperforming companies.

“In today's governance and investment climate, CEOs who achieve better performance benefit from even greater job stability while underperforming CEOs are even more exposed to public scrutiny. Such scrutiny may ultimately limit the discretion that the board of directors can exercise to keep the underperformer,” said Schloetzer.

Unfortunately, the crisis management CEO replacement trend has grown over the past decade as the number of business failures have increased. And, it's only going to get worse, according to The Conference Board: “… analysis of CEO tenure statistics, coupled with continuing disruption across industries in which CEO turnover has been high in recent years, suggests a coming wave of leadership change,” according to the 2018 edition of The Conference Board's CEO Succession Practices.⁷ The percentage of CEO appointments at S&P 500 companies that went to outsiders jumped to 44 percent. That is more than triple the percentage for the previous two years, when the proportion of outside appointments was a little over 14 percent.

Long-Term Planning and Mentorships

The most traditional trend for CEO succession planning involves integrating the company's long-term strategy with the performance of the sitting CEO and grooming of the rest of the C-suite and middle management as potential leaders. But it is the one method directors seem to have trouble with for myriad reasons. Whether it's a reluctance to broach the topic when a company is doing well or a lack of good communication with the company's management (namely the CHRO) about possible internal candidates, a good number of boards are severely lacking when it comes time to replace the CEO.

Directors attending a 2017 roundtable on the job description of a corporate director by The Conference Board Governance Center agreed that CEO succession planning is one of the corporate board's most important jobs, especially as it pertains to interacting with management. Essentially, participants agreed that there must be a regular process the board and management stick to over several years and that it needs to go beyond just the CEO.

“Boards should think about a multiyear [CEO succession] process,” Debra Perry, a director for Genworth Financial and KornFerry, said at the roundtable. “The board and management need to assess who is coming through the ranks of the company. The CEO role is the primary focus, but there needs to be a process for positions below the chief executive.”

According to PwC's 2018 Annual Corporate Directors Survey, some boards⁸ aren't satisfied with their companies' C-suite and middle management succession planning. Twenty-three percent of directors queried rated their companies' job of C-suite succession planning as fair or poor while 25 percent rated their companies' job of middle management succession planning as fair or poor.

By almost the same percentage, the board at S&P 500 companies chose to appoint an interim CEO in almost two out of ten CEO successions in 2017, according to The Conference Board. Gradual transitions have become more common, and so has the option to appoint interim CEOs. While in each of the last two years, approximately 10 percent of CEO succession events involved an interim appointment, the rate increased to 18.5 percent in 2017. This has happened, for example, at CSX Corp in response to the sudden death of its CEO; at Equifax in the wake of its major cybersecurity breach; and at Autodesk after a period of having two co-interim CEOs. In these and other cases, the length of service for interim CEOs ranged from less than one month to eight months, with four boards ultimately offering the permanent position to the executive serving in the interim.

Previously used mainly in situations of emergency, the practice no longer necessarily reveals shortcomings in the planning process or the need to indefinitely prolong the search for a successor. Instead, it can be implemented for a variety of reasons: to audition the person who is already expected to become permanent CEO; for the interim to groom the eventual candidate to the position; or to better manage the public relations aspects of a lengthier leadership transition.

Gender Diversity Planning

The top institutional investors—BlackRock and State Street—have made it quite clear they want more women on corporate boards on the S&P 500 and Russell 3000. Granted, they only raise the issue of a dearth of female directors and not CEOs because they hold the power of the proxy vote to elect directors. But the lack of female directors is not just a board problem; it is a management problem. The argument given by many sitting directors is that the reason there aren't more women on boards is because there aren't enough women leading public companies. Of course, the problem there aren't enough female CEOs is because the male-dominated boards won't hire them.

Consider these figures from Spencer Stuart. Very slowly some of the larger public companies are starting to get the message: More women have to be considered as candidates for chief executive or sitting directors will eventually face the wrath of the powerful institutional investors.

Women represent just 21 percent of S&P 500 board directors and only 6 percent of S&P 500 CEOs. LeanIn.Org and McKinsey & Company's Women in the Workplace 2016⁹ study found that more than three times as many men are hired from the outside as SVPs. By the time women reach the SVP level, they hold just 20 percent of line roles.

While gender diversity continues to be elusive at the helm of the largest U.S. public companies, the number of CEO positions held by women in the S&P 500 in 2017 rose to the highest level recorded by The Conference Board over 17 years. Seven female CEOs left the S&P 500 in 2017: They are Meg Whitman of Hewlett Packard Enterprise, Irene Rosenfeld of Mendelez, Ursula Burns of Xerox, Marissa Mayer of Yahoo!, Gracia Martore of Tegna Inc., Debra Crew of Reynolds American, and Shira Goodman of Staples (Goodman in fact stepped down in early 2018, but Staples was dropped from the index in 2017, together with Yahoo!, Tegna, and Reynolds American).

These departures were countered by eight new additions: seven newly appointed female CEOs (Adena Friedman of Nasdaq, Gail Boudreaux of Anthem Inc., Michele Buck of Hershey, Michelle Gass of Kohl's, Margaret Georgiadis of Mattel, Geisha Williams of PG&E, and Virginia Drosos of Signet Jewelers) and the addition to the S&P 500 of Advanced Micro Devices, which is led by CEO Lisa Su. As a result, the total number of S&P 500 companies with a female chief executive rose to 27 in 2017, from the 26 seen in 2016.¹¹

These figures underscore the degree to which gender parity remains elusive in corporate leadership: If the rate of increase in female representation in the CEO community were to continue at the 2001–2017 level, there would still be fewer than 100 women CEOs of S&P 500 companies in 2034.

SpencerStuart¹² and PwC¹³ stated in separate 2018 reports that diversity and inclusion in the workplace, especially when it is promoted and adopted, improves a company's bottom line. And that is something larger institutional investors are taking into account when they look from their portfolio companies.

PwC's 18th Annual Global CEO survey found that 85 percent of CEO respondents said having a diversified and inclusive workplace population improved their bottom line. In a recent piece of thought leadership on ways to “foster inclusion and diversity,” the SpencerStuart Human Resources Practice made the following conclusion regarding CEOs: “It's also important that senior leadership acknowledge that inclusion and diversity is not a one-off initiative but should be part of the culture.”

The article went on to quote Leander LeSure, CHRO of Getty Images, who participated in a SpencerStuart panel discussion in July 2018: “I've seen senior leadership feel they have to do something ‘right now,’ so it became a project that's time-boxed and dies after 12 months,” LeSure said. “How do we make this into something you can't shake apart? It's about the culture in which we sit. But it really requires in a very classic way the ownership and accountability of the senior leader. It doesn't matter how pretty the deck is that I can create. It really comes down to [the] voice CEO puts around this. Otherwise it will die.”

Best Practices for CEO Succession Planning

While the CEO succession planning stories that get the most coverage involve business failures and emergency replacements, they are actually the outliers. There are quite a few public companies that understand the importance of weaving CEO and C-suite succession planning into the regular strategy and performance review process. Below are some examples of successful “normal” CEO succession plans:¹⁴

Examples of CEO Succession Planning Disclosure

A major part of CEO succession planning is the disclosure of the practices the board and management carry out relating to the process. A 2017 analysis of financial services companies showed that more than half included such disclosures in their annual disclosure to shareholders.¹⁵ In particular, disclosure has become a predominant practice among the largest financial companies, and 83.3 percent of those with assets valued at US$10 billion and over regularly include this type of information in reports to shareholders. Numbers are much lower in manufacturing and nonfinancial services companies.

Here are examples of 2017 CEO succession planning disclosures by some S&P 500 companies:

Conclusion

While there has been some progress among S&P 500 companies in the area of CEO succession planning, there is still room for improvement. Interviews with directors and research by such organizations as The Conference Board and the National Association of Corporate Directors show that there are two major elements to a successful CEO succession plan: ensuring the process is ongoing and part of executives' development and performance assessments and regularly disclosing to shareholders what the succession planning process entails.

About the Author

Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board composition, and shareholder activism. He serves as executive editor of Director Notes, an online publication published by The Conference Board for corporate board members and business executives that covers issues such as governance, risk, and sustainability. He is also the editor of the ESG Blog for The Conference Board ESG Center.

Prior to joining The Conference Board, he was the editor and writer of PwC's Governance Insights Center's biweekly newsletter and editor and writer of KPMG's Audit Committee Insights biweekly newsletter. Previously, Larkin had served as an editor for several daily and weekly newspapers, including The Bond Buyer and the Hartford Business Journal.