The strategic importance of CEO succession is indisputable, and the elements of effective succession planning have long been known. So why do many boards plan poorly for CEO succession when the cost of failure is so high?
How Boards Botch CEO Succession
When David Goldberg, CEO of Surveymonkey Com LLC, an online-survey company based in Palo Alto, California, died unexpectedly in May 2015, the company did not announce a new CEO until July. It considered 75 candidates, both internal and external, before appointing former Hewlett-Packard Co. and Microsoft Corp. executive Bill Veghte to the position. However, Veghte remained in the CEO role less than six months; in January 2016, he was replaced by Zander Lurie, who had been SurveyMonkey’s chairman.
Compare that with the case of Sigma-Aldrich Corp., a St. Louis-based life science and technology company. In November 2010, Jai P. Nagarkatti, its then-chairman, president, and CEO, died unexpectedly. The next day, the board of directors simultaneously announced his death and the promotion to president and CEO of Rakesh Sachdev — previously Sigma-Aldrich’s CFO, chief administrative officer, and senior vice president of the international business. Sachdev stayed in the CEO role until late 2015, when the company was acquired by Merck KGaA. The Sigma-Aldrich board was able to act quickly after Nagarkatti’s death because it had already carefully considered the succession of its senior leadership.
These two contrasting vignettes underscore the need for boards to establish emergency and long-term CEO succession plans. Boards have known for years that they should do this, so why don’t they? In this article, we answer that question by exploring the changing CEO succession landscape. We share data from 124 directors about current practices and suggest concrete steps forward.
An Increasingly Important Issue
After analyzing CEO transition events at S&P 500 companies from 2000 to 2014, the New York-based Conference Board, a business research nonprofit, discovered that the average CEO tenure had become shorter. The average CEO tenure was 9.5 years between 2000 and 2004, but 8.5 years between 2010 and 2014. The Conference Board also found that only a small fraction of companies have a dedicated CEO succession committee. Instead, 60% assigned the responsibility to the full board of directors; 21% assigned it to the nominating committee; 15% assigned it to the compensation committee; and the remaining 4% assigned it to a dedicated succession committee or “other.”
While leadership succession should have already had a prominent place on board agendas, a 2009 change in the U.S. Securities and Exchange Commission’s (SEC) guidance made the topic even more important.