Archive for December, 2010
Deciding whether a departing CEO should serve on the board and oversee a successor might seem like a benign consideration. But it can impede an organization’s efforts to move forward and ultimately affect the bottom line, a recent study found.
Matteo Tonello, director of corporate governance research at The Conference Board, said the findings aren’t surprising because “it’s something we have been anecdotally seeing as The Conference Board works with board members.”
“This is a very timely study because companies are changing their lead executives more often than in the past,” Tonello noted.
Powerful CEOs Linger Longer
The report, released Oct. 5, 2010, analyzed 358 CEO turnovers for reasons other than mergers, reorganizations, spinoffs and death at S&P 1500 firms from 1998 to 2001. It looked at a variety of data, including length of the departing CEO’s board service, personal and professional attributes of the incoming CEO, and the firm’s subsequent stock performance.
According to the study, the effects of a former CEO’s retention on the board also seem to vary based on individual attributes. For example, there was a negative correlation between postturnover stock returns and board retention of a CEO who wasn’t a founder of the firm. In addition, the study found that board retention frequently involves powerful, aging CEOs who have achieved a less-than-distinguished record of financial performance at their firm in the years leading up to their departure, Schloetzer said.
One-Third Invited to Stay
While retaining the departing CEO on the board is done less frequently than in the past, “it still occurs somewhat frequently today,” Schloetzer said. According to The Conference Board’s 2010 Survey of Board Practices, about 35 percent of surveyed companies said they invite the departing CEO to remain on the board.
According to Schloetzer’s study, former CEOs remained on their companies’ boards for at least two years in 130 of 358 (36 percent) of turnovers reviewed.
Attributes that appear to impact the decision include whether the CEO owns a large percentage of the firm’s stock, whether he or she is holding the board chairman position jointly and whether the board has relatively few independent directors.
Meanwhile, the study found that departing CEOs were often retained if the succession choice enabled the former CEO to keep a relatively powerful bargaining position within the firm.
- Are we doing this because of “solid pre-departure performance” or because of his or her power and influence over the board?
- Will the departing CEO harm the successor selection process or alter the quality and characteristics of prospective successors?
- Should the successor define his or her relationship with the former CEO, or should directors decide?
- Are we prepared to take action should conflict arise?
- Instead of a board position, could we engage in informal communication when questions arise or retain access to the former CEO through a well-defined short-term consulting agreement?
Few companies have explicit policies on retaining departing CEOs on their boards. Most consider it on a case-by-case basis, Tonello said. He added that there’s no “one-size-fits-all solution” because some companies might decide that “the benefits of retaining a CEO on the board outweigh the negatives.”
A board that opts to retain the former CEO should take “appropriate safeguards,” according to Tonello:
- The time frame of the former CEO’s board tenure should be determined clearly in advance so that “it’s well known that this would be a temporary thing and that at some point the CEO will step down from his director role as well,” Tonello said.
- Activities and functions of the former CEO as director should be overseen by the board’s lead independent director, if one exists. Increasingly, boards have added such positions to help guarantee a balance of power that helps facilitate a smooth transition, Tonello noted.
- All board members, including retained former CEOs, should undergo performance evaluations. Many boards assess performance as a whole annually but do so less frequently with specific directors.
Although the study shows that successors are constrained by the presence of predecessors, Quigley said it’s not clear why that happens.
“Predecessors might wield their influence by saying ‘no’ a lot, or it might be that successors limit certain initiatives because they sense they could face resistance or worse.” Furthermore, Quigley said, predecessors might be “selectively resistant to certain changes, and perhaps the best CEOs are those who can figure out where and how they can have influence without running afoul of the predecessor.”
Meanwhile, Quigley admitted that when it comes to hard-charging CEOs, personality traits could play a role.
“Future work needs to consider how factors like narcissism or openness to change might influence the process,” Quigley said.
Reprinted with permission of the Society for Human Resource Management (www.shrm.org), Alexandria, VA, publisher of HR Magazine. © SHRM
“A new CEO is likely to bring change and change is very difficult for any organization. It makes it even harder if the old CEO is still around. Old loyalties are there, and that will make any change that the new CEO makes even harder for people in the organization to accept.”