Succession planning is a good thing, right? It ensures continuity and stabilises a company. But what if it could achieve something else?
Researchers from the Netherlands have looked at hundreds of companies to find that published succession plans also calm the markets at the moment when a star CEO reveals they are moving on.
The team probed 676 chief executive changeover events and found that markets react well to new blood coming in if a company has already made public its succession plan.
“We find that CEO succession planning disclosure mitigates adverse market reactions to outperforming CEOs’ resignation announcements,” the team writes.
There is much attention given to CEO turnover, especially if the incumbent happens to have performed well and pleased the markets. It follows that markets react badly when high-flyers announce their departure.
But it seems that can be dealt with. Looking at CEOs from 2000 to 2012, the researchers compared departure announcements to dates of public succession planning statements. Plans revealed well in advance of an exit appeared to soothe markets when the fateful day finally comes around. This, the team says, suggests “succession planning disclosure relieves investors’ uncertainly about a smooth leadership transition”.
They went a step further. Using a list of proxies for strong corporate governance, the team crosschecked with departure data. Where markets are at ease over losing a noteworthy CEO, the result is even more pronounced if the background of the company hada governance reputation to be envied.
No mere formality
“Our study,” says the team, “is the first to empirically document that capital market investors take into account the presence of formal succession planning in the event of CEO turnover.”
Succession and the departure of chief executives is a notoriously sensitive topic among board members and investors.
In a study published last year, it emerged that forcing a CEO out could undermine the reputation of the remaining directors and potentially be viewed as a governance failure by investors.
Previous studies reveal that even the biggest companies struggle with succession. One study showed more than two thirds of the UK top 100 companies had raised succession as a problem in communications with shareholders.
London appears to be experiencing a wave of CEO departures at the current time. Figures from headhunters Russell Reynolds suggest departures in the FTSE 350 have tripled year on year. To some extent, this is a “backlog”, following lockdowns during which many CEOs stayed beyond their expected departure dates. But the changing economic landscape—invasion of Ukraine, rising energy prices and higher inflation—may also play a part in prompting a need for new skill sets.
Succession will never not be difficult. And despite encouragement, many companies fail to put in place reliable plans. This latest study suggests that those who do so will please investors.