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CEO Succession Planning

David F. Larckerand

James Irvin Miller Professor of Accounting, Stanford Graduate School of Business

Professor of Law (by courtesy), Stanford Law School

Director of the Corporate Governance Initiative and Senior Faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford

Brian Tayan

Researcher, Corporate Governance Research Initiative, Stanford University Graduate School of Business

As part of its oversight function, the board of directors is responsible for ensuring that correct management is in place to run the organization. This includes hiring, evaluating, and—when circumstances merit—removing or replacing the chief executive officer.

In this chapter, we review the process by which board members carry out this function. We start with an overview of the market for CEO talent and examine the individuals that serve in this role, their backgrounds, and attributes. We then explore how frequently companies change CEOs—specifically, how responsive boards are in terminating underperforming chief executives. Next, we consider incoming CEOs, including whether replacements are primarily sourced from within or outside the company and how this decision impacts future performance. We end by reviewing the various models that companies adopt to plan for succession events, and evaluate the tradeoffs implicit in their selection.

We will see that, while organizations are inconsistent in how effectively they manage the CEO evaluation and replacement process, general best practices exist for effective succession planning and these are indicative of sound corporate governance quality.

The Market for Chief Executive Officers

There are approximately 5,000 CEOs of publicly traded corporations in the United States. For the most part, companies appoint a single executive to hold this position. Only 82 companies appointed co-CEOs during the 19-year period 1996–2014.1

The career paths and personal and professional characteristics of CEOs vary considerably. The CEO of a typical S&P 500 company in the United States is 58 years old.2 On average, he or she has served as CEO for five years and, including previous positions, has a tenure of 15 years with the company. Tenure as CEO, however, is spread across a wide distribution: While 10 percent have served as CEO for less than one year, 6 percent have served for 21 years or longer (see Exhibit 3.1).3

Bar chart depicts the Tenure of Sitting CEOs and Longest Serving CEOs.

EXHIBIT 3.1 Tenure of Sitting CEOs and Longest Serving CEOs

Sources: Equilar (2018); The Conference Board (2017).

Executives are not limited in terms of the functional backgrounds that qualify them to serve as CEO. While CEOs are most likely to have prior experience in finance, operations, or marketing, many have prior experience in sales, law, consulting, strategic planning, and even academia. A third of CEOs have international experience, a percentage that has been rising in recent years.4

CEOs also have diverse educational backgrounds. Among S&P 500 companies, 22 percent of CEOs have an undergraduate degree in engineering and 16 percent in economics, with business administration, accounting, and liberal arts the next most common majors. Thirty-five percent of CEOs hold an MBA and 34 percent have another advanced degree, such as law, medicine, or PhD. The most commonly attended universities are Harvard, Princeton, Stanford, University of Texas, and University of Wisconsin. A small minority (7%) have military experience.5

Researchers have not established the extent to which the personal or professional background of the CEO influences (or predicts) future performance. Custódio, Ferreira, and Matos (2013) found that CEOs with a general managerial background receive higher compensation than those with a specialized background, indicating that broad managerial skills are more useful and in higher demand than firm-specific experience. The authors did not test whether general management skills are associated with superior performance.6 Falato, Li, and Milbourn (2015) found that companies pay a premium for CEOs based on their reputation in the industry, age, and educational background, and that these premiums are justified based on subsequent performance.7

Cai, Sevilir, and Yang (2015) examined the track records of CEOs that received managerial training among a relatively small set of prestigious corporations, such as General Electric, IBM, and Procter & Gamble, before being recruited to other firms. They found that the stock market reacts positively to the announcement of their appointment as CEO, and that the reaction is more positive the more years the executives previously spent at those corporations. The authors also found that these CEOs deliver superior operating performance over a subsequent three-year period. They concluded that certain firms “are efficient in developing leadership skills and CEO specific human capital” because “they are able to expose executives to a broad variety of industries and help them develop skills that can be transferred to different business environments.”8

Kaplan, Klebanov, and Sorensen (2012) examined the relation between the personal and managerial attributes of CEOs and corporate performance. They used in their sample venture-backed and private-equity owned corporations and collected detailed assessments of the CEOs across 30 dimensions. They found that attributes having to do with work style (such as speed, aggressiveness, persistence, work ethic, and high standards) are more predictive of performance than personal attributes (such as listening skills, teamwork, integrity, and openness to criticism). They concluded that “there appears to be substantial variation in general managerial talent that is measurable” and that these attributes are related to performance. Still, the authors cautioned that research on the relation between personal characteristics and corporate performance is in its infancy and that the results might not be generalizable.9

Along similar lines, Gow, Kaplan, Larcker, and Zakolyukina (2016) categorized CEOs according to the “Big Five” factors broadly seen by psychologists as reliable and durable descriptors of individual personality: introversion/extraversion, agreeableness, conscientiousness, neuroticism/emotional stability, and openness to experience. They found some evidence that CEO personality attributes are related to the strategic and investment choices these executives make and to firm performance. For example, extraversion is negatively associated with performance. The authors noted that more work is required to understand the relation between CEO personality and organizational outcomes.10

Researchers have also examined the relation between personal experiences of the CEO and corporate outcomes. For example, Benmelech and Frydman (2015) found that CEOs with a military background are less likely to engage in fraudulent activity.11 Bernile, Bhagwat, and Rau (2017) found that CEOs who witnessed minor natural disasters in their youth are “desensitized to the negative consequences of risk” and lead organizations that adopt more aggressive corporate policies, whereas CEOs who witnessed major natural disasters that led to large loss of human life subsequently manage corporations more conservatively.12 Davidson, Dey, and Smith (2015) found that CEOs who spend lavishly on their own personal lives oversee corporations with loose internal controls. The authors concluded that “measures of executives' ‘off-the-job’ behavior capture meaningful differences in managerial style.”13 Still, the relation between the personal or professional attributes of the CEO and corporate outcomes is unproven (see the following sidebar).14

Researchers also do not have a clear understanding of the labor market for CEO talent, by which we mean the difficulty of the CEO job, the number of executives qualified to serve as CEO of a company at a given time, and the degree to which companies are effective in identifying, attracting, and recruiting those executives. According to one study, CEO talent among the largest companies in the United States is exceptionally scarce and the labor market for CEO talent very tight. Based on a survey of Fortune 250 company directors, the Rock Center for Corporate Governance at Stanford University (2017) found that directors believe only four people—including those both inside and outside their company—would be capable of stepping into the CEO role immediately and running the company at least as well as the current CEO. Directors held similar views on the scarcity of talent capable of running the operations of their largest competitor or of turning around a company struggling in their industry. If correct, this has important implications for succession planning, internal talent development, performance evaluations, and CEO pay.16

CEO Turnover

A typical CEO serves for seven to ten years, on average, before departing—implying an annual turnover rate of 10 to 15 percent.17 While some CEOs are terminated for performance-related reasons, others depart because of planned retirement, recruitment to another firm, health-related reasons, or because they are terminated following a change in control of the company. Time series data from PricewaterhouseCoopers suggests that approximately half of CEO successions since 2000 were due to planned departure and half were due to an acquisition or forced termination.18

Practically speaking, however, it is often difficult for shareholders to determine the true motivation behind an executive's departure. Executives do not usually announce that they have been asked to resign, and it is typically only during a public dispute that a forced resignation is apparent. For example, in 2014, the founder and CEO of American Apparel was fired following allegations of personal misconduct and misuse of corporate funds. The board of directors voted to dismiss him for cause and a copy of his termination letter was released to the Wall Street Journal.19 By contrast, when the CEO of United Technologies unexpectedly resigned that same year, he gave no justification for his departure, other than to state he was “proud of the transformation of the company” during his tenure and that “my wife and I look forward to the next chapters of our lives.” The company too offered no comment other than to announce a successor.20

From a governance perspective, the most important issue for shareholders is whether the board of directors is effectively monitoring CEO performance and is willing to change leadership if required. The research literature suggests that, while boards are indeed more likely to terminate an underperforming CEO, they are generally less quick to do so than shareholders might expect. For example, Brickley reviewed the research literature from the 1980s and 1990s and found that, while an inverse relation exists between CEO turnover and firm performance, the sensitivity is quite low. Firms that rank in the bottom decile in terms of performance are only approximately 4 percent more likely to terminate a CEO than firms in the top decile. He found that age is significantly more important than firm performance in explaining CEO turnover.21

Huson, Parrino, and Starks (2001) had similar findings. The authors grouped companies into quartiles, based on various measures of operating performance over five-year periods, and calculated the implied probability that the CEO is terminated for nonperformance. For example, between 1989 and 1994, companies in the bottom quartile had return on assets of –3.7 percent compared with 12.1 percent among companies in the top quartile. Still, the implied probability that the CEO was terminated was only 3.4 percent among bottom quartile companies compared with 0.7 percent among top. That is, the probability of the CEO being terminated increased by only 2 percentage points even though the lowest quartile delivered significantly worse operating returns.22 Similarly, a study by Booz & Co. found that companies in the lowest decile in terms of stock price performance underperform industry peers by 45 percentage points over a two-year period, and yet the probability that the CEO is forced to resign only increases by 5.7 percent. The authors commented that “boards are giving underperforming CEOs more latitude than might be expected.”23

Later studies found a stronger link between performance and turnover. Jenter and Lewellen (2014) tracked CEO-specific performance over longer periods of time and estimated that almost 40 percent of CEO turnovers are performance induced. They explained the difference between their findings and those of previous studies in terms of data classification: While the departures of long-tenured CEOs are generally referred to as scheduled retirements, in fact many are performance driven and should be considered forced termination. Under this approach, the authors concluded that the relation between performance and turnover is stronger than previous studies indicated.24

In a similar vein, the firm exechange has developed a model called the Push-out Score to systematically evaluate the circumstances surrounding CEO and CFO departures. Unlike models that strictly categorize executive departures as forced or voluntary, the Push-out Score produces a score on a scale of 0 to 10, with a score of 0 indicating that it is “not at all” likely that the executive was terminated and 10 that termination was “evident.” The Push-out Score incorporates a range of publicly available data about the form in which the departure was announced, the language in the announcement, the official reason for departure, the timing of the departure relative to the announcement, the age and tenure of the executive, recent stock price history, and other circumstantial factors. The result of this model is that an executive departure is rarely categorized as voluntary or involuntary. Departures are assigned a score that amounts to a confidence level that the CEO was forced to leave. Sample data from exechange shows that over time Push-out Scores are distributed fairly evenly across the scoring system of 0 to 10, reflecting the ambiguity surrounding most CEO departures and further helping to explain why researchers have trouble determining the relation between CEO performance and termination.25

Researchers have also identified other factors that influence CEO turnover:

  • Board Oversight. CEOs are more likely to be terminated for poor performance if they are subject to vigilant oversight by the board of directors. This includes companies with a high percentage of outside directors, companies whose directors own a large percentage of shares, and companies with “powerful” independent directors.26 Conversely, companies with weak boards are less likely to terminate an underperforming CEO, including companies with “busy” boards, companies whose directors share important social affiliations with the CEO, and companies whose directors were largely brought in by the current CEO.27
  • Shareholder Oversight. CEOs are also more likely to be terminated for poor performance if they are subject to shareholder oversight. For example, companies with concentrated share ownership by institutional investors exhibit greater sensitivity of turnover to performance.28 By contrast, companies with staggered or classified boards exhibit lower sensitivity to performance.29
  • Restatements. CEOs are almost twice as likely to be terminated following a major financial restatement. Turnover among other members of the senior executive team is also elevated following a major restatement.30

Finally, it might be the case that companies do not terminate an underperforming CEO because CEO evaluations are not rigorous. For example, a survey by the Rock Center for Corporate Governance at Stanford University and The Miles Group found that only 16 percent of directors believe that their performance evaluation process is very effective (see Exhibit 3.2).31 Without strict performance metrics and a strict evaluation of the CEO against those value drivers, it is difficult for the board to hold the CEO accountable for underperformance let alone terminate that individual.

Bar chart depicts the Effectiveness of CEO Performance and Evaluation Process.

EXHIBIT 3.2 Effectiveness of CEO Performance Evaluation Process

Perspective of corporate directors in response to the question, “How would you evaluate the effectiveness of the CEO performance evaluation process?” Note that data represents the directors' self-assessment and might skew positive.

Source: Stanford University and The Miles Group (2013).

Incoming CEOs

For the most part, companies choose to replace an outgoing CEO by promoting an executive from within. According to The Conference Board, between 70 and 80 percent of successions involve an internal replacement.32 These percentages are somewhat lower than a few decades ago. Murphy and Zabojik (1999) found that in the 1970s and 1980s approximately 90 percent of newly appointed CEOs at S&P 500 companies were promoted from within the company.33

Companies face multiple tradeoffs in determining whether to recruit an insider or outsider to fill the CEO role. The most important of these are experience and cultural fit. While most inside executives have never before served as the CEO of a publicly traded corporation, external candidates usually include sitting CEOs with a proven track record of performance. Some boards prefer this arrangement because they believe it reduces the risk of making the wrong selection. Others prefer internal promotions because they allow the board to monitor firsthand the progress and development of internal executives over multiple years. Still, the factors that influence whether an incoming CEO is successful are numerous and complex. These include the applicability of previous skills and experiences; the ability to make decisions; leadership style; cultural fit; personal relations with internal and external stakeholders, including the board of directors, senior management, and shareholders; and the scope of strategic, operating, and financial challenges facing the company.

The research literature generally shows that internal CEOs perform better than outsider CEOs. For example, a 2010 study by Booz & Co. found that internal CEOs delivered superior market-adjusted shareholder returns in seven out of the preceding ten years. The authors also found that internal CEOs remain in the CEO position longer and are less likely to leave due to forced termination.34

However, this research is subject to important limitations. Companies that recruit external CEOs tend to be in worse financial condition. For example, Parrino (1997) found that approximately half of all CEOs who were forced to resign for performance reasons were replaced by an outsider, compared with only 10 percent of CEOs who voluntarily resigned or retired.35 It might be the case that external CEOs deliver worse performance on average because they are more likely to be hired into challenging operating conditions. For this reason, it is difficult to conclude whether internal or external candidates are systematically better operators.

Finally, external CEOs tend to receive higher compensation than internal executives promoted to this position. Data from Equilar shows that externally recruited CEOs receive as much as $3 million more in first-year total compensation than internally recruited CEOs, depending on the size of the company.36 Three reasons generally account for this premium. First, because external candidates are more likely to have CEO-level experience than internal executives, they demand higher first-year compensation. Second, external candidates recruited to a new firm require compensation for the value of long-term incentives that they have accrued but not yet received from their current employer; for successful and long-tenured executives, this value can be quite large. Third, because underperforming companies are more likely to go outside for a new CEO, they are required to offer higher compensation to compensate for the higher risk of failure (i.e., a risk premium in their compensation package).

Models of Succession Planning

Generally, the board of directors adopts one of four approaches to selecting a new CEO. These are:

  1. Recruiting an external candidate
  2. Promoting a single internal candidate to the role of president or chief operating officer
  3. Establishing a “horse race” between two or more promising internal candidates
  4. Conducting simultaneously an internal horse race and an external search

As with any corporate practice, tradeoffs are associated with each. Ultimately, a company should adopt a succession model that is appropriate for its situation.

External Candidate

For various reasons, a board might decide to look outside the company for a new CEO: The company might be in dire financial or operating condition; it might lack qualified senior leadership; it might be recovering from a scandal, lawsuit, or reputational challenge; or other conditions might prevail that require a wholesale change in strategy, operations, workforce, or culture. In these situations, the board might believe that only an external candidate is capable of delivering the performance the board and shareholders require.

Once the decision has been made, an external search is very straightforward. The board usually engages a third-party consultant or search firm to identify qualified candidates. Candidates are interviewed and evaluated, and the list is narrowed to the most promising before an offer is made. However, even in the best of circumstances, an external search requires considerable time, during which the company might be operating under an interim or emergency CEO. Although statistics on the duration of an external search are difficult to find, a sample compiled by Ballinger and Marcel (2010) found that interim CEOs serve in that position for an average of 195 days (over half a year) before being replaced by a permanent successor.37

President and/or Chief Operating Officer

A second approach to succession planning is to elevate an executive to the role of president and/or chief operating officer (COO) with the intention of grooming him or her to succeed the CEO at a later date. The executive might come from within or outside the company, although the vast majority of promotions are internal. For example, Automatic Data Processing (ADP), The Coca-Cola Company, ExxonMobil, and Marriott International in recent years have all promoted a single executive to the president or chief operating officer position for two to four years before then promoting that individual to CEO.

The primary benefit of this approach is that the board of directors gets the opportunity to see firsthand how the executive handles CEO-level responsibility without first having to formally grant him or her the position. If the candidate proves unsuccessful, the board has greater latitude to make a change. Still, there are several challenges to this approach. Turnover among the rest of the senior management team is likely to increase as other promising executives learn that they have been passed over for promotion (i.e., succession planning is almost always a multi-person event). The roles and responsibilities of the CEO and COO need to be clearly defined so that decision making is not impaired. And a reliable timeline for transition should be established so that both parties know in advance the duration of the arrangement. It is problematic to have an “anointed” person in the COO role for an extended time period because the COO visibility makes this person an attractive candidate for another organization and because it might signal that the board has changed their mind about promoting the COO into the CEO role.

Horse Race

A third approach is to identify two or more promising executives and initiate a “horse race” whereby they directly compete with one another for the CEO role. In the process, each is given a formal development plan and their progress is monitored by the board and the current CEO. This approach was famously employed at General Electric where Jeffrey Immelt, James McNerney, and Robert Nardelli competed to succeed outgoing CEO Jack Welch. The primary advantage of this approach over the president/COO model is that the board of directors has the opportunity to evaluate more than one candidate before deciding on a successor. A horse race, however, can become a politically charged public spectacle that is highly disruptive. If the candidates are made known, it can attract media attention, with stakeholders and non-stakeholders alike speculating on who will win. A horse race can also cause internal divisions, as employees, executives, the board, and the CEO jockey to position a favored candidate for success. The end typically precipitates a talent exodus as the candidates that were passed over do not want to work for the executive they lost to.

Inside-Outside Model

The fourth approach to succession planning is the “inside-outside” model. Under this approach, the board identifies promising internal candidates for development—as in a horse race—and simultaneously conducts an external search to identify the most promising candidates outside of the company. The primary benefit of this approach is that it allows for the most thorough evaluation of talent available to the company. The primary drawback is that it requires considerable time, effort, and coordination among multiple parties to ensure that it is conducted fairly and efficiently. It is also quite difficult for the board to validly compare an internal candidate that they know well with a less familiar external candidate. This can result in important biases (i.e., the board has seen the internal candidates in junior roles and are aware of their mistakes, but they do not have similar insights into external candidates who might unfairly be judged to be superior). It is important that the board guard against psychologically favoring external candidates.

Common Practices in Succession

Despite the variety of options available to the board in establishing a succession plan, common practices exist that improve the likelihood of success. These include the following:

Board-Led Process

The board of directors—and not the outgoing CEO—selects the next CEO. Succession is a board-level obligation and the board alone is responsible for designing and overseeing a process that leads to an optimal decision. This includes reviewing the company's competitive positioning and strategy with fresh eyes, and outlining the leadership qualities necessary for success. Although rigorous research does not exist to establish whether board-led successions are more successful than CEO-led successions, among a nonscientific sample of successors hand-picked by the outgoing CEO between 2000 and 2011, 80 percent underperformed the S&P 500 Index during their tenure. The average level of underperformance was 24 percentage points.38

Experienced Directors

Succession is led by one or more directors with previous experience with a succession event, either as a board member of another company or participating in one as a CEO. Experience allows the board to understand and prepare for the procedural and interpersonal challenges that can unexpectedly arise and threaten to derail the process—for example, the unexpected departure of a key candidate, interoffice conflicts, or uncooperative behavior by the outgoing CEO.

Skills-and-Experience Profile

A skills-and-experience profile is a formal document that outlines the managerial and leadership qualities required of the next CEO based on a forward-looking view of the company. If the future needs of the company are different from its present ones, the skills and experiences required of the next CEO will also be different from those of the current one. The skills-and-experience profile provides a formal checklist against which internal and external candidates are to be evaluated.

Rigorous Talent Development

The company develops a rigorous and reliable talent development program for senior executives. This program is integrated with—and not isolated from—the succession program. The human resources department or third-party consultants assist in developing growth plans for executives and monitoring progress. Board members themselves might choose to personally mentor top talent. Unfortunately, research by The Conference Board, The Institute of Executive Development, and the Rock Center for Corporate Governance at Stanford University found that most directors do not have detailed knowledge of the skills, capabilities, and performance of senior executives just one level below the CEO. Only half (55%) of the directors surveyed in the study claim to understand the strengths and weaknesses of these executives well or very well. Most (77%) do not participate in their performance evaluation. In only rare circumstances (7%) does the company formally assign a board mentor to senior executives below the CEO.39 Without active participation of board members in the talent development process, it is not difficult to understand why many successions fail (see the following sidebar).

Active Participation of the CEO

Although succession is board led, the process requires the active participation of the CEO. The CEO has unique insights into the firm, knows the strengths and weaknesses of internal candidates, and his or her active participation should allow for a smooth transition before, during, and after the succession event.

Finally, some debate exists whether the outgoing CEO should remain on the board of directors after stepping down as CEO. Quigley and Hambrick (2012) found that outgoing CEOs who remain on the board restrict the degree to which their successors make strategic changes.40 Evans, Nagarajan, and Schloetzer (2010) found that companies are more likely to retain the outgoing CEO on the board if the company had strong stock price performance during his or her tenure; however, they also found that companies that do so exhibit lower future performance.41

Conclusion

CEO succession planning is a core responsibility of the board of directors, implicitly related to long-term stewardship of the firm and shareholder capital. The evidence in this chapter suggests that boards of directors are not uniformly effective in carrying out this function. One reason for this shortcoming is the lack of established best practices in planning for a succession event and conducting an evaluation of executive talent, inside and outside the organization. Corporate circumstances are unique and it is difficult to apply an approach that was successful in one environment to another. Still, the skill and care with which a board plans for a CEO departure and identifies a qualified successor can provide important insights into the general care with which they exercise their oversight responsibilities and the overall quality of governance at the firm.

About the Authors

Photo of David F. Larcker.

David F. Larcker is the James Irvin Miller Professor of Accounting, Stanford Graduate School of Business; Professor of Law (by courtesy), Stanford Law School; and Director of the Corporate Governance Initiative and Senior Faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford. Professor Larcker has published many articles and book chapters on topics such as executive compensation, corporate governance, and strategic business models. He is the coauthor of Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences and his most recent book is entitled A Real Look at Real World Corporate Governance. He has served as a consultant to numerous organizations on corporate governance and design of executive compensation contracts. He serves on the editorial boards of the Journal of Accounting and Economics; Journal of Accounting Research, Accounting, Organizations and Society; and the Journal of Applied Corporate Finance. Professor Larcker received the Notable Contribution to Managerial Accounting Research award in 2001. In 2012, he was named to the NACD Directorship 100 as one of the most influential people in the boardroom and corporate governance community. He is currently a Trustee for Wells Fargo Advantage Funds.

Photo of Brian Tayan.

Brian Tayan is a researcher at the Corporate Governance Research Initiative at the Stanford University Graduate School of Business. Brian's work focuses primarily on corporate governance, although he has also written cases in the areas of financial accounting, human resource management, operations, and strategy. He has co-authored two books, Corporate Governance Matters and A Real Look at Real World Corporate Governance, in collaboration with Professor David F. Larcker. Previously, Brian has worked as a financial analyst in the Office of the CFO at Stanford University and as an investment associate at UBS Private Wealth Management in San Francisco. He received his MBA from Stanford GSB and his BA from Princeton University.

Notes

  1. 1.   Dinesh B. Hasija, Alan E. Ellstrand, Dan L. Worrell, and Heather Dixon-Fowler, “Two Heads May Be More Responsible Than One: Co-CEOs and Corporate Social Responsibility,” Journal of Management Policy and Practice 18(2) (2017): 9–21.
  2. 2.   Korn Ferry Institute, “Age and Tenure in the C-Suite” (February 14, 2017).
  3. 3.   Meghan Felicelli, “Route to the Top,” Spencer Stuart (November 5, 2008); and Equilar, “CEO Tenure Drops to Just Five Years” (January 19, 2018).
  4. 4.   Meghan Felicelli (2008), and Heidrick & Struggles, “CEO & Board Practices: Route to the Top 2017” (2017).
  5. 5.   Meghan Felicelli (2008); Heidrick & Struggles (2017); The Conference Board, “CEO Succession Practices” (2017).
  6. 6.   Cláudia Custódio, Miguel Ferreira, and Pedro Matos, “Generalists versus Specialists: Lifetime Work Experience and Chief Executive Officer Pay,” 108 Journal of Financial Economics (2013): 471–492.
  7. 7.   Antonio Falato, Dan Li, and Todd T. Milbourn, “Which Skills Matter in the Market for CEOs? Evidence from Pay for CEO Credentials,” Management Science 61(12) (2015): 2845–2869.
  8. 8.   Ye Cai, Merih Sevilir, and Jun Yang, “Made in CEO Factories,” Kelley School of Business Research Paper No. 13-15, Social Science Research Network (2014, updated 2015).
  9. 9.   Steven N. Kaplan, Mark M. Klebanov, and Morten Sorensen, “Which CEO Characteristics and Abilities Matter?” Journal of Finance 67 (2012): 973–1007.
  10. 10. Ian Gow, Steven N. Kaplan, David F. Larcker, and Anastasia A. Zakolyukina, “CEO Personality and Firm Policies,” Social Science Research Network (2016).
  11. 11. Efraim Benmelech and Carola Frydman, “Military CEOs,” Journal of Financial Economics 117 (2015): 43–59.
  12. 12. Gennaro Bernile, Vineet Bhagwat, and P. Raghavendra Rau, “What Doesn't Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior,” Journal of Finance 72(1) (2017).
  13. 13. Robert Davidson, Aiyesha Dey, and Abbie Smith, “Executives' ‘Off-the-Job’ Behavior, Corporate Culture, and Financial Reporting Risk,” Journal of Financial Economics 117 (2015): 5–28.
  14. 14. The relation if any between CEO personality and corporate outcomes is tied to the broader debate over the extent to which the CEO can influence overall firm performance. For example, Thomas (1988) found that CEOs are responsible for only 3.9 percent of the variance in performance among companies, while Mackey (2005) found that the impact is much greater: as high as 29.2 percent. See Alan Berkeley Thomas, “Does Leadership Make a Difference in Organizational Performance?” Administrative Science Quarterly 33 (1988): 388-400; and Alison Mackey, “How Much Do CEOs Influence Firm Performance—Really?” Social Science Research Network (2005).
  15. 15. Amanda Gerut, “Spot the ‘Royal Jelly’: A Veteran Chair on Hiring CEOs,” Agenda (June 2, 2014).
  16. 16. Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University, “CEO Talent: America's Scarcest Resource? 2017 CEO Talent Survey” (2017); see also, Nicholas Donatiello, David F. Larcker, and Brian Tayan, “CEO Talent: A Dime a Dozen, or Worth Its Weight in Gold?” Stanford Closer Look Series (September 27, 2017).
  17. 17. The Conference Board (2017).
  18. 18. Strategy&, “Explore 17 Years of CEO Changes” (2017). Available at https://www.strategyand.pwc.com/ceosuccess#showGraph.
  19. 19. Suzanne Kapner, Ethan Smith, and Joann Lublin, “Inside the American Apparel Revolt,” The Wall Street Journal (June 20, 2014).
  20. 20. Ted Mann and Joann S. Lublin, “Boss at United Tech Makes a Sudden Exit,” The Wall Street Journal (November 25, 2014); and United Technologies, “UTC Names Gregory J. Hayes as President and Chief Executive Officer,” press release (November 24, 2014).
  21. 21. James A. Brickley, “Empirical Research on CEO Turnover and Firm Performance: A Discussion,” Journal of Accounting and Economics 36 (2003): 227–233.
  22. 22. Mark R. Huson, Robert Parrino, and Laura T. Starks, “Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective,” Journal of Finance 56 (2001): 2265–2297.
  23. 23. Per-Ola Karlsson, Gary L. Neilson, and Juan Carlos Webster, “CEO Succession 2007: The Performance Paradox,” strategy+business (2008).
  24. 24. Still, discretion and certain methodological assumptions are required before making this recategorization. See Dirk Jenter and Katharina Lewellen, “Performance-Induced CEO Turnover,” Stanford University, Tuck School at Dartmouth working paper (2014).
  25. 25. For more information on exechange methodology, including examples, see: https://exechange.com; see also Ian D. Gow, David F. Larcker, and Brian Tayan, “Retired or Fired: How Can Investors Tell If a CEO Was Pressured to Leave?” Stanford Closer Look Series (May 25, 2017).
  26. 26. Brickley (2003); and Kathy Fogel, Liping Ma, and Randall Morck, “Powerful Independent Directors,” European Corporate Governance Institute (ECGI)—Finance 404, Social Science Research Network (2015).
  27. 27. “Busy” boards are defined as boards with a majority of directors who hold three or more directorships. Social affiliations that are shown to reduce director independence include common experiences in the military, university affiliation, hometowns, professional colleagues, or academic and industry experiences. See Eliezer M. Fich and Anil Shivdasani, “Are Busy Boards Effective Monitors?” Journal of Finance 61 (2006): 689–724; Olubunmi Faleye, “Classified Boards, Firm Value, and Managerial Entrenchment,” Journal of Financial Economics 83 (2007): 501–529; Jeffrey L. Coles, Naveen D. Daniel, and Lalitha Naveen, “Co-opted Boards,” Review of Financial Studies 27 (June 2014): 1751–1796; and Byoung-Hyoun Hwang and Seoyoung Kim, “It Pays to Have Friends,” Journal of Financial Economics 93 (2009): 138–158.
  28. 28. Brickley (2003); and Reena Aggarwal, Isil Erel, Miguel Ferreira, and Pedro Matos, “Does Governance Travel Around the World? Evidence from Institutional Investors,” Journal of Financial Economics 100 (2011).
  29. 29. Staggered or classified boards are boards in which directors are elected to three-year terms on a rotating basis, with one-third of directors up for nomination in a given year; classified boards are shown to insulate directors and management from shareholder pressure. See Olubunmi Faleye, “Classified Boards, Firm Value, and Managerial Entrenchment,” Journal of Financial Economics 83 (2007): 501–529.
  30. 30. Marne L. Arthaud-Day, S. Trevis Certo, Catherine M. Dalton, and Dan R. Dalton, “A Changing of the Guard: Executive and Director Turnover Following Corporate Financial Restatements,” Academy of Management Journal 49 (2006): 1119–1136; and Suraj Srinivasan, “Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members,” Journal of Accounting Research 43 (2005): 291–334.
  31. 31. Center for Leadership Development and Research at Stanford Graduate School of Business, the Rock Center for Corporate Governance at Stanford University, and The Miles Group, “2013 CEO Performance Evaluation Survey” (2013).
  32. 32. The Conference Board (2017).
  33. 33. Kevin J. Murphy and JánZábojník, “Managerial Capital and the Market for CEOs,” Social Science Research Network (2007).
  34. 34. Ken Favaro, Per-Olda Karlsson, and Gary L. Neilson, “CEO Succession 2000–2009: A Decade of Convergence and Cmopression,” strategy+business 59 (Summer 2010).
  35. 35. Robert Parrino, “CEO Turnover and Outside Succession: A Cross-Sectional Analysis,” Journal of Financial Economics 46 (1997): 165–197.
  36. 36. Equilar Inc., “In with the New: Compensation of Newly Hired Chief Executive Officers” (February 2015).
  37. 37. Gary A. Ballinger and Jeremy J. Marcel. “The Use of an Interim CEO During Succession Episodes and Firm Performance,” Strategic Management Journal 31 (March 2010): 262–283.
  38. 38. David F. Larcker, Stephen A. Miles, and Brian Tayan, “The Hand-Picked CEO Successor,” Stanford Closer Look Series (November 18, 2014).
  39. 39. The Conference Board, The Institute of Executive Development, and the Rock Center for Corporate Governance at Stanford University, “How Well Do Corporate Directors Know the Senior Management Team?” Director Notes (March 2014).
  40. 40. Timothy J. Quigley and Donald C. Hambrick, “When the Former CEO Stays on as Board Chair: Effects on Successor Discretion, Strategic Change, and Performance,” Strategic Management Journal 33 (2012): 834–859.
  41. 41. John Harry Evans, Nandu J. Nagarajan, and Jason D. Schloetzer, “CEO Turnover and Retention Light: Retaining Former CEOs on the Board,” Journal of Accounting Research 48 (2010): 1015–1047.
  42. 42. Heidrick & Struggles and the Rock Center for Corporate Governance at Stanford University, “2010 CEO Succession Planning survey” (2010).
  43. 43. Ibid.
  44. 44. The Institute of Executive Development and the Rock Center for Corporate Governance at Stanford University, “2014 Report on Senior Executive Succession Planning and Talent Development” (2014).
  45. 45. Ibid.
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