The 2014 Study of CEOs, Governance, and Success
This is the 15th year that Strategy& has examined CEO successions and success among the world’s top 2,500 public companies. This year we’ve assessed how much progress companies have made toward better CEO succession planning, how much value some companies are leaving on the table with poor planning, and the potential value of further improvement.
Change at the top is destabilizing for any company. CEO turnovers lead to shifts in the top team, changing corporate priorities, and an inward focus at most companies. And all that is related to a real financial effect: among companies undergoing a turnover for any reason, we’ve found that median total shareholder return (relative to the indexes on which companies trade) drops to -3.5 percent in the year after a turnover takes place, based on our analysis of the most recent three years of turnovers.
When companies are forced into turnovers, the drop in median shareholder returns is even more dramatic: a fall to -13 percent return in the year leading up to the CEO change and just -0.6 percent in the year after. We estimate that these returns mean that each company that has undergone a forced turnover has foregone some $1.8 billion more in shareholder value than companies that have undergone planned turnovers.
There is good news: the share of planned turnovers (instead of forced) has improved by 30% since the early years of our study. We estimate that companies can add some $60 billion in shareholder value if the total share of forced turnovers stabilizes at 10%, a bit below 2014’s rate of 14%. Furthermore, there are a number of straightforward steps companies can take to improve their CEO succession process, from those as simple as always having a plan to more complex steps like being sure to always look ahead at the company’s needs, not back at candidates’ track records.