CHAPTER 03 CEO Succession Trends and Best Practices
Recent Trends in CEO Departures
– CEO performance metrics are expanding to include non-financial criteria. Historically, companies that performed better from the perspective of shareholder return tended to experience significantly lower succession rates than those that performed poorly. According to the Conference Board Report, in 2020 the gap was the narrowest it has been since 2014 and was four times smaller than the gap in 2019 – the worse-performing companies on the S&P 500 had a succession rate of 12.7%, whereas better-performing companies had a succession rate of 10.5%. Although total shareholder return and financial performance are and always will be important factors, the data indicate that CEO performance metrics are expanding to include non-financial criteria with an emphasis on environmental, social and governance (ESG) issues, such as diversity and inclusion and climate change. For example, increased pressure from activists and investors led six of Canada’s largest banks to tie CEO performance and pay to ESG metrics as an indication of the banks’ commitment to these critical issues. – Fewer interim CEOs are being appointed. Interim CEO appointments reached a four-year low in 2020. This was mostly attributed to the need to eliminate uncertainty during the turbulent times caused by the pandemic and to present a more robust and well-considered succession plan to stakeholders. Among select CEO departures, interim successors were appointed only when an unexpected or sudden departure occurred and the board appeared to struggle to find a viable candidate to appoint as a permanent successor. In this situation, data reveal that a board member, often the board chair, steps into the interim CEO role. This was the case in the high-profile CEO departure of Terry Booth from TSX-listed Aurora Cannabis Inc. on February 6, 2020. – More non-executive directors are being appointed as successor CEOs. In 2020, approximately 23% of CEOs appointed to Russell 3000 companies were non-executive directors compared with just
In July 2021, The Conference Board released CEO Succession Practices in the Russell 3000 and S&P 500: 2021 Edition , its annual benchmarking study that documents and analyzes succession events of CEOs of major publicly traded companies in the United States over the previous year (Conference Board Report). The following are our analyses of some of the key themes identified in the Conference Board Report. – CEO turnover lagged in Q2 2020 before returning to normal levels by the end of 2020 and early 2021. As companies attempted to navigate the tumult caused by the pandemic, boards seemed to prioritize continuity of CEOs. In fact, several CEO departures announced in late 2020 and early 2021 were originally planned for early 2020, but postponed. This was also true for some Canadian companies. Calin Rovinescu, CEO of Air Canada (listed on the Toronto Stock Exchange (TSX)), cited the pandemic as the reason for delaying his original retirement plans until February 2021. However, succession announcements picked up significantly in the second half of 2020, suggesting that boards felt more comfortable pursuing succession plans once they better understood the impact of COVID-19. The December 2021 CEO Turnover Report published by Challenger, Gray & Christmas, Inc. recorded 1,337 CEO resignations in 2021, a 1.8% increase over the 1,314 CEOs who left their posts in 2020. Now that we have passed the two-year mark of the pandemic, we expect CEO departure rates will continue to rise. – CEO tenure is declining. The average tenure among S&P 500 CEOs in 2020 was 6.1 years, representing a significant decrease from the 10.8-year average tenure among S&P 500 companies a mere five years ago. Tenure levels are expected to continue to decline in the coming years as CEO turnover rates continue to increase.
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Davies | dwpv.com
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