Chapter 7- CEO Succession Flashcards
What is the CEO turnover trends?
- Planned
- Forced
- Mergers and Acquisitions
Increasing numbers turning over due to planned reasons (6 up to 12%)
Relatively stable numbers turning over due to being forced (3-5%)
Relatively stable numbers turning over due to mergers and acquisitions (1-3%)
What causes CEO turnover? What is the relationship?
What is the sensitivity of the factor?
What is the CEO turnover rate on average per year?
Performance causes CEO turnover. is generally inverted proportional to the turnover. CEO’s who underperform are more likely to be terminated, however that is not always the case, many CEO’s who are poor performances do not get terminated.
It is not very sensitive, (termination rates for those who underperform are not much higher than the termination rates for those who over perform)
It is about 17%
What is the relationship between the underperforming CEO and strong corporate governance? What are the four reasons why a strong corporate governance company is likely to fire an underperforming CEO?
Companies with strong governance are more likely to terminate an underperforming CEO:
- Boards are not that busy
- Boards with high percentage of outside directors
- Directors own large percentage of shares
-Shareholder base concentrated among handful of institutions.
What is the trend regarding the ambiguous reasons for management turnover?
It has been increasing over the years, CEO’s have been turning over much more for little to no good reason.
How do shareholders react when an underperforming CEO is terminated?
What does this theory state?
Shareholders react positively to news that underperforming CEO’s are terminated and replaced with an outsider.
This is consistent with a theory that independent oversight reduces agency costs and management entrenchment
What is succession?
Process for identifying, recruiting, training, and mentoring high performance employees with leadership potential, preparing them to step into the senior most and / or c-suite positions when vacancies occur.
What are four major succession stories
- Rupert Murdoch leaving Fox and his son Lachlan taking over
- Rogers family used succession star to smear Ex-CEO
- Tim cooks decade at Apple being the most successful successor CEO
- Prada turns to ex-Luxottica CEO Guerra to ease succession.
What are the three costs of getting succession wrong for large companies?
- Lost opportunities - An estimated 112 billion more in market value in the year before and the year after their turnover if their CEO succession had been the result of planning.
- Even in cases where successions are planned, financial performance suffers in the year before and after the change.
- There is always a cost to changing the leadership, companies pay a much bigger price when they get into situations where it can only be resolved by forcing out their CEO.
What are 7 factors that make the CEO job tougher?
- Pace of technological development
2 Rapid change makes long range planning difficult - Global competitive markets
- Overwhelming information provided through the internet
- Leading and managing the needs of a diverse workforce
- Meeting the expectations of shareholders / members
- Regulation.
What causes CEO’s to fail on the supply and demand side?
Supply - Candidate characteristics
Demand - Decision maker bias
What are the 3 characteristics of successful CEO’s and failed?
Successful:
1. Humble
2. Feedback seeking
3. Unselfish
Failed
1. Arrogant
2. Fail to listen
3. Selfish
What are the 5 poor decision making norms on the demand side and describe what they mean?
- In group bias - Preferential treatment to one’s group (in and out groups)
- Bandwagon Effect - Doing what is popular
- Confirmation Bias - Seek Confirmation
- Escalation of Commitment - Precedent / Sunk Costs
- Overconfidence.
Is the Labour market for CEO’s truly efficient? What are the three Yes and no arguments?
Yes:
1. Top candidates negotiating with smart boards
2. These candidates are selected carefully
3. Reputation at risk
No:
1. Hard to evaluate executive skills
2. Difficult to predict in advance whether a candidate will succeed
3. Size of market is limited
What are two things that have happened to the labour pool in recent years?
What is the result of it, and how do we make new leadership?
- Shrinking pool due to widespread business retirement
- Downsizing of middle management and flattening of the organization through the past decade creates shortage of executive talent
- 66% of the senior managers hired externally fail within the first 18 months
- Succession planning process
What are four characteristics trends of CEO’s currently?
- Women CEO’s are on the rise, but there are still more named Michael than women
- They tend to be tall
- They tend to have high cognitive abilities
- They tend to be emotionally stable
Who should be responsible for succession?
Who are the four groups and the percentage of companies that leave CEO succession too?
The conference board has found that only a small fraction of companies have a dedicated CEO succession committee
Board of directors - 37%
Nominating and governance committees - 31%
Chairman or lead director - 20%
CEO themselves - 11%
What are the 4 benefits of succession planning?
What happens if we fail to have succession planning?
- Reduced costs - Loss of business / pay for desperation
- Reduced anxiety / fear- By internal and external stakeholders
- Prepare for CEO retirement situations - Prevent lawsuits / create transparent transitions / groom new leadership
- Prepare for crisis situations - Unexpected loss of CEO (death/termination/departure for better opportunity) -
Lack of transition planning can result in post transition meltdown
What are the three parts of the succession process?
- Who needs to be actively engaged together?
- Amount of time for Transition
- What are the 6 parts of the ongoing activity?
- Relies on the full engagement of both the board of directors and senior management of the company.
- Successful leadership transition required a lot more upfront effort and time than the search that takes 3-4 months
- Is an ongoing activity - Strategy, roles, descriptions, candidates, selection, accountability.
What are the 4 models of CEO succession planning?
What are the 2 special cases?
- External candidate
- President and / or COO (heir apparent)
- Horse Race
- Inside Outside model
- Interim CEO’s
- Director CEO’s
When did external hiring typically happen?
What is an external candidate?
Previously mostly hired in poorly performing firms to turn around performance
Company recruits an external candidate
What are the 2 advantages of external candidates?
What are the 4 disadvantages of external candidates?
Advantages:
1. Tends to have proven experiences as CEO
2. Freer to make strategic, operating, and cultural changes.
Disadvantages:
1. Less familiar with company
2. Leads to disruption among operations and staffing
3. Board has not evaluated performance first hand
4. Leadership style pay not translate well to a new environment
What is the trends regarding the cost of recruiting internal vs external candidates?
The cost of the candidate from external tends to be higher because they need to pay more to attract them or risk losing them to other firms.
What percentage of successions involve internal replacement?
What type of firm is more likely to select an internal candidate?
Describe the compensation of the internal CEO’s vs External CEO’s
70-80%
Those with strong performance
Internal CEO’s receive lower first year total compensation, as the external CEO’s must be bought out of contracts and companies in poor financial condition have to pay more to attract qualified candidates.
What is the heir apparent method?
Company promotes a leading candidate to position of president and / or chief operating officer (COO)
