Chapter 7 Flashcards
CEO Turnover Effect
- Inversely proportional to performance
- Top performing companies: 0.8% turnover
- Bottom performing companies: 2.7% turnover
Reasons for CEO Turnover
- M&A
- Poor performance
- Misconduct
- Retirement
CEO theory turnover
- independent oversight reduces agency cost and management entrenchment
CEO turnover and tenture
roughly 9.5 to 8.5 years between 2010 to 2014
What are the factors that make CEO jobs tougher?
- technological development
- Rapid changes
- Global competitiveness
- information overload from the internet
- diverse workforce
- meeting expectations
What is the supply side of sustainable leadership?
- candidate characteristics
Successful: humble, feedback seeking, unselfish
What is the demand side of sustainable leadership?
Decision Makers’ Biases
examples: in-group bias, bandwagon effect, confirmation bias, escalation of commitment, overconfidence bias
Define labour market
refers to the process by which the available supply is matched with demand
The labour market for CEO
hard to judge skills
the number of people that can be in this position is tight
Labour pool
- 66% of people hired from the outside fail within the first 18 months
- a shrinking pool of talent due to widespread business
Who are the main committee in charge of CEO succession?
- full board
- nominaiting committee
- governance committee
- chairman and lead director
Succession planning
an effort to protect the organization’s capacity to perform key functions, sustain important relationships and fulfil its commitment during a leadership transition
Why does succession planning matter?
- largest revenue and profit comes from effective talent management and talent outcomes
Benefits of Succession planning?
- reduce cost
- reduce anxiety and fear
- prepare for CEO retirement situations
- prepare for a crisis situation
The Succession Process
Relies on the involvement of board directions and senior management
- takes about 3-4 months of up-front effort
External Candidate model
- Recruits from external sources
previously used by poor-performing firms
Pro of External Candidate Method
- tend to have more proven and experienced CEO
- more free to make strategic changes
negative of an external candidate
- less familiar with the company
- board has not evaluated performance first hand
- leadership style might not translate well
- usually more costly
Internal Candidate
- companies with strong performance use this method
- less costly and CEOs receive less in the first year
Heir Apparent
companies promote leading candidate to position of president and COO
Pro of Heir Apparent
– board evaluates performance first hand
- customizable
- experience first hand and familiarity
- BRINGS CONTINUITY and smooth transition
Con of Heir Apparent
- increase complexity
- responsibility needs to be clear and differentiated
- risk of becoming lifetime COO
- brings more of the same thing
Horse Race
Two or more internal candidates competing
Pro of Horse Race
- board observes performance
- does not commit to the preferred candidate
- develop specific skills
The negative of Horse Race
- highly public
- creates internal factions
- brain drain from the loser
Internal-Outside Model
company develops internal talent whilst evaluating outside candidates
Pro Internal- Outside MOdel
- internal talent development
- levels the playing field
- external validation assures the board the best CEO is selected
Negative of Inside Outside model
- requires significant planning and oversight
- a breakdown in the process can lead to erosion of trust
Interim CEO
- ONE MONTH TO TWO YEARS
- used in situations of emergency and reveals shortcomings of the planning process
Director CEO
The director assumes the role of CEO
Current board performance in succession planning
- survey shows lack of preparedness
- companies emphasize emergency rather than permanent succession
Why do companies don’t have succession planning?
- looks at it like talent management rather than risk management
- internal development process is inadequate
- overly differential to the current CEO
- no consensus over skills and experiences required to be a CEO of the company
