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Companies looking outside for CEOs.

In 2012, 27.1 percent of S&P 500 companies facing a CEO succession hired an outsider for the top job--that rate confirms an upward trend recorded since the 1970s, when less than 10 percent of CEO hires were outsiders; it is much higher than the 19 percent reported in 2011.

This is according to CEO Succession Practices: 2013 Edition, a new report by The Conference Board. The report, released annually, documents CEO turnover events among S&P 500 companies, based on findings from a survey of general counsel and corporate secretaries at more than 330 U.S. public companies.

"Our finding on outside hires for the CEO position is quite interesting as it may suggest that there is a need to continue to strengthen companies' leadership development practices," says Matteo Tonello, managing director of corporate leadership at The Conference Board and coauthor of the report.

"The heated pay-for-performance debate of the last few years has induced boards of directors to increase the rigor of the CEO selection process. The growing percentage of outsiders chosen as new CEOs may show that directors don't always like what they find within the companies' rank," he adds.

One noteworthy twist on the decision to hire external talent, explains Jason Schloetzer, a report coauthor and assistant professor at the McDonough School of Business at Georgetown University, relates to the selection of a director from the company's own board as CEO. "The director-turned-CEO succession model provides companies with a chief executive who is familiar with corporate strategy and key stakeholders, thereby reducing leadership transition risk."

Among the other key findings:

* Despite steady average CEO succession rates, dismissals hit a 10-year high in 2012. Fifty-three CEOs in the S&P 500 left their post in 2012, or 10.9 percent, which is consistent with the average number of annual succession announcements from 2000 through 2011.

The rate of CEO dismissals varies widely across the 2000-2012 period, ranging from 40 percent in 2002 to 13.2 percent in 2005. In 2012, 31.4 percent of all successions were nonvoluntary departures, the highest rate since 2003.

* Companies in the services industries experienced higher than average CEO succession rates. The rate of CEO succession had significant variation across industry groups during 2012. The services industry had a succession rate of 18 percent in 2012, higher than its 13-year average of 16.2 percent. By contrast, the succession rate in the extraction industry was just 5.6 percent during 2012.

* Mandatory CEO retirement policies remain seldom used. Mandatory CEO retirement policies based on age are an infrequent element of CEO succession plans. Only 11.8 percent of manufacturing companies and 8 percent of nonfinancial services companies adopt an age-based mandatory retirement policy for CEOs.

* CEO departure may offer opportunity to reconsider board leadership model. Only 18.8 percent of successions in 2012 involved the immediate joint appointment of an individual as CEO and chairman of the board of directors. Based on succession announcements, one-third of departing CEOs remained as board chairman for at least a brief transition period, typically until the next shareholder meeting, while several departing CEOs retained significant influence with the company as board chairman.

* Formal succession process credited for the choice of new CEO, except when hired from outside. Perhaps surprisingly, only 22.9 percent of succession announcements among S&P 500 companies in 2012 explicitly stated that the incoming CEO was identified through the board's succession planning process. This is noticeably lower than the 32.4 percent in 2011.

There appears to be a link between inside promotion to the CEO position and the succession planning process--31.6 percent of announcements that mention the board's role in the succession planning process involve an insider appointment as incoming CEO, whereas no successions that involve an outside hire reference succession planning.

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Author:Heffes, Ellen M.
Publication:Financial Executive
Geographic Code:1USA
Date:Jun 1, 2013
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