CEO succession

CEO succession is a perennial governance issue, with many boards nominating this as an ever-present concern. One of the boards' main roles is the appointment and, if necessary, removal of the chief executive officer. Commentary underpinning Recommendation 2.1 on the nomination committee in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations places responsibility for ensuring CEO succession with the committee.

A review of research by The Adelante Group1 shows that CEO tenure is less than five years on the ASX200, 30—40 per cent of CEOs fail in their first three years, and it can take ten years to recover from a poor CEO selection. Its research also shows that in 2013, 68 per cent of ASX200 CEO appointments were internal candidates, which is below the global average of 76 per cent, yet external candidates have twice the failure rate, shorter tenures and deliver just half the shareholder returns of internal candidates.

PwC has also recently released a report, 15th annual CEO succession study: The value of getting CEO succession right, looking at CEO succession trends at the 2,500 largest public companies in the world. In comparison to other companies internationally, where CEO succession is planned 86 per cent of the time, Australian companies undertake planned CEO succession only 77 per cent of the time. The report indicates that high-performing companies are more likely to recruit their CEO internally, and internal CEO succession is part of the culture of the company, with high-performing companies appointing one internal candidate after another 82 per cent of the time, significantly more than low-performing companies.

The report also shows that, in Australia, there was 35 per cent more turnover of the CEO in leading companies than in comparison with leading companies globally. Australian CEO turnovers result in a shareholder loss of approximately AU$8 billion. Not surprisingly, forced CEO turnovers lead to significantly more shareholder loss than planned CEO succession.

Both reports highlight the importance of boards putting in place intensive internal development programs for senior management as part of planning for CEO succession. Yet The Adelante Group notes that CEO direct reports often get less performance feedback and development opportunity than more junior leaders. Future CEOs (who are also key executives today) can be left knowing little about where to focus their development efforts, and how they are viewed by the board.

The focus on CEO succession is likely to heighten, given the repercussions for investors, and boards need to not only develop clear CEO succession plans, but also put in place development plans for future internal leaders. The Adelante Group notes ‘it is one thing to have a name for an emergency situation, it is very different for the board to have someone they believe is ready to lead the corporation for the next five years’.

1. G Campbell, The Adelante Group, ‘Actively developing future CEOs: Boards need to ensure it happen’, Governance Directions, May 2015

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