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Published: May 24, 2012
 / Summer 2012 / Issue 67

 
 

CEO Succession 2011: The New CEO’s First Year

The share of outsiders taking on a new CEO position also varies significantly by industry. Over the past five years, nearly a quarter of all companies in the utilities industry that brought in a new CEO chose that CEO from outside; they were followed closely by telecommunications and financial-services companies, at 23 percent. These three industries have hired among the highest proportion of outsiders over the past five years when compared with other industries. These numbers suggest that the recent turmoil and consolidation in these industries (brought on both by the financial crisis and by the industries’ ongoing search for new revenue from outside their core businesses) is forcing boards to look beyond the tried and true for executives who can take the business in new directions.

Despite the rise in the number of outsider appointments to the CEO post, our analysis indicates that over time, insiders have delivered better returns during their tenure. The likely reason: Insider CEOs’ “tribal knowledge” of their company and culture, and the strong internal relationships developed over the course of their career, increase the odds of successfully running the company. Moreover, from 2009 to 2011, outsiders were much more likely to be dismissed — only 18.5 percent of insiders were let go, compared with 34.9 percent of outsiders. (See Exhibit 5.) That suggests in part why the median tenure of an insider CEO in 2009–11 was almost a year longer than that of an outsider — 5.1 years versus just under 4.3 years — and why, over the past 12 years, insiders have consistently had a longer tenure than outsiders.

The proportion of CEOs who were also appointed (or remained) their company’s chairman has been declining over the long term, from a level near 45 percent early in the last decade to nearly half that level in recent years. The trend reversed slightly in 2011; the percentage of new appointments to the dual role rose to 14 percent. Despite this reversal, the fundamentals haven’t changed, and we expect the long-term decline to continue. Meanwhile, though the overall percentage declined slightly, a high proportion of outgoing CEOs continued to be appointed chairman as part of planned successions, especially in Japan, where nearly two-thirds of outgoing CEOs became chairman, and in North America, where 37 percent did. On the other hand, just 17 percent of European companies chose this “apprentice” succession plan, confirming their continued preference — or regulatory requirement — for an “independent” chairman.

Far more insider chief executives made the transition to the chairmanship following their tenure as CEO than did outsiders. The popularity of having the outgoing CEO mentor a new apprentice CEO suggests that many boards, especially those directing large companies, appreciate the complexity and pressure faced by new CEOs. The fact that a large proportion of apprentice CEOs are guided by an insider chairman only confirms our view that boards are continuing to try to strike a balance between continuity and the search for fresh blood at the highest level of their company. (See Exhibit 6.)

What the New CEO Can Expect

The 14.2 percent succession rate for 2011 means that some 350 chief executives among those at the world’s 2,500 largest public companies are new to their job. And as we know from prior analysis, nearly 90 percent of new CEOs, on average, have not been a CEO before. Some have spent their entire career at the company they are now running; others have had no experience with their new company at all. Some have run other companies; some are facing an entirely new level of responsibility with their new position. The challenges faced by this incoming class of CEOs during their first year will vary considerably, depending on where they came from, the nature and size of the company to which they have been appointed, and the geographies in which the companies operate. What can these new CEOs expect, given who they are and where they work?

 
 
 
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Resources

  1. Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “The Four Types of CEOs,” s+b, Summer 2011: Last year’s study suggested that the nature of the CEO’s job varies with the role of the corporate core — and that the more involved headquarters is in operational decision making in any given company, the more fragile the CEO’s tenure is likely to be.
  2. Ken Favaro, Per-Ola Karlsson, Jon Katzenbach, and Gary L. Neilson, “Lessons from the Trenches for New CEOs: Separating Myths from Game Changers,” Booz & Company white paper, January 2010: The practices that will substantially contribute to success for new CEOs.
  3. Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “CEO Succession 2000–2009: A Decade of Convergence and Compression,” s+b, Summer 2010: This study documented a decade’s worth of CEO succession trends and noted how governance norms are converging and the job of the CEO is compressing, in terms of both tenure and capacity.
  4. Gary L. Neilson and Julie Wulf, “How Many Direct Reports?Harvard Business Review, April 2012: An author of this article and a Harvard Business School professor discuss why the CEO’s average span of control, measured by the number of direct reports, has doubled, rising from about five in the mid-1980s to almost 10 in the mid-2000s.
  5. For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership and the Booz & Company website at: booz.com/global/home/what_we_think/featured_content/ceo_succession.