More Companies Looking Outside To Hire Their Next CEO

New Report from The Conference Board Examines CEO Succession in the S&P 500

During 2012, 27.1% of S&P 500 companies facing a CEO succession hired an outsider for the top job, according to CEO Succession Practices: 2013 Edition, a new report by The Conference Board released today.

CEO turnover up in 2012

The rate confirms an upward trend recorded since the 1970s, when less than 10% of CEO hires were outsides; it is much higher than the 19% reported in 2011.

Released annually, CEO Succession Practices documents CEO turnover events among S&P 500 companies.

The 2013 edition contains a historical comparison of 2012 CEO successions with data from the last decade, and analyzes the relationship between CEO succession and company performance.

It also describes succession-planning practices (including the adoption rate of mandatory CEO retirement policies and the frequency of performance evaluations), based on findings from a survey of general counsel and corporate secretaries at more than 330 U.S. public companies.

“Our finding on outside hires for the CEO position is quite interesting as it may suggest that there is a need to continue to strengthen companies’ leadership development practices,” said Matteo Tonello, managing director of corporate leadership at The Conference Board and coauthor of the report.

“The heated pay-for-performance debate of the last few years has induced boards of directors to increase the rigor of the CEO selection process. The growing percentage of outsiders chosen as new CEOs may show that directors don’t always like what they find within the companies’ ranks.”

“One noteworthy twist on the decision to hire external talent is the selection of a director from the company’s own board as CEO,” adds Jason Schloetzer, a report co-author and assistant professor at the McDonough School of Business at Georgetown University. “The director-turned-CEO succession model provides companies with a chief executive who is familiar with corporate strategy and key stakeholders, thereby reducing leadership transition risk.”

Among the report’s key findings:

Despite Steady Average CEO Succession Rates, Dismissals Hit A 10-Year High In 2012

In 2012, 53 CEOs in the S&P 500 left their post.

The rate of CEO succession in calendar year 2012 was 10.9%, consistent with the average number of annual succession announcements from 2000 through 2011.

The rate of CEO dismissals varies widely across the 2000–2012 period, ranging from 40% in 2002 to 13.2% in 2005 (on average, 24.5% for the period). In 2012, 31.4% of all successions were non-voluntary departures, the highest rate recorded since 2003.

Companies In The Services Industries Experienced Higher Than Average CEO Succession Rates

The rate of CEO succession had significant variation across industry groups during 2012. The services industry had a succession rate of 18% in 2012, higher than its 13-year average of 16.2%. By contrast, the extraction industry, which includes mining, petroleum products, and natural gas companies, had a succession rate of only 5.6% during 2012, lower than its 13-year average of 9.5%.

CEO Departure May Offer Opportunity To Reconsider Board Leadership Model

Only 18.8% of successions in 2012 involved the immediate joint appointment of an individual as CEO and chairman of the board of directors.

Based on succession announcements, one-third of departing CEOs remained as board chairman for at least a brief transition period, typically until the next shareholder meeting, while several departing CEOs retained significant influence with the company as board chairman.

Formal Succession Process Credited For The Choice Of New CEO, Except When Hired From Outside

Perhaps surprisingly, only 22.9% of succession announcements among S&P 500 companies in 2012 explicitly stated that the incoming CEO was identified through the board’s succession planning process.

This is noticeably lower than the 32.4% of successions that referred to the succession planning process in 2011. There appears to be a link between inside promotion to the CEO position and the succession planning process—31.6% of announcements that mention the board’s role in the succession planning process involve an insider appointment as incoming CEO, whereas no successions that involve an outside hire reference succession planning.

Mandatory CEO Retirement Policies Remain Seldom Used

Mandatory CEO retirement policies based on age are an infrequent element of CEO succession plans.

Only 11.8% of manufacturing companies and 8% of nonfinancial services companies adopt an age-based mandatory retirement policy for CEOs; the number is lower in the financial industry. The highest level of policy adoption (19.4%) is reported by manufacturing and nonfinancial companies with annual revenue of $20 billion or greater.

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Source: The Conference Board