Commenting on CEO succession planning across major companies, Senior Portfolio Manager Trevor Green and Senior ESG analyst, Louise Piffaut from Aviva Investors said:
“Too few companies have a robust plan for when the chief executive steps down. To replace a CEO, company boards must consider several key questions. What kind of leader is needed to implement the strategic priorities of the business? Is continuity or fresh thinking required? How will markets react to a new hire?
“Without a strategy for the transition, companies are often left scrambling for answers under the glare of media and shareholder scrutiny. Perhaps it is not surprising, then, that poor hiring decisions are common. This is bad news for investors, as a failed CEO appointment can have a material impact on performance.
“A recent Harvard Business Review study found botched succession planning wipes out close to $1 trillion in market value every year among companies on the S&P 1500.[1]
“These costs stem from a variety of factors. Some companies underperform after hiring unsuitable external candidates; others after promoting insiders who prove unequal to the top job. The loss of intellectual capital among firms whose CEOs leave to take other opportunities was also found to have a negative effect on value across the index.
“So how can companies do better? We see three key lessons.
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Boards must take succession more seriously.First, boards must take succession more seriously. While there is evidence companies have become more focused on the issue – partly due to increased leadership churn during the convulsions of the pandemic – further progress is required. Over half of board members in a recent survey of over 500 US companies admitted they needed to improve CEO succession planning.
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Companies must cultivate leadership talent internallyIf rising stars are identified early, they can be given coaching opportunities and rotations that broaden their skills and experience well before a vacancy arises. Companies might also consider bringing succession candidates onto the board, so their work can be assessed first-hand by other directors.
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To minimise disruption, companies should consult a range of stakeholders at an early stage in the succession process, including shareholders.This is not to argue investors should be given the final say, only that is sensible to get a sense of what they are looking for in the next CEO. As well as input from investors, a diverse range of internal views can help build a rounded picture of the strengths and weaknesses of candidates.”