In the fast-paced and dynamic world of business, leadership transitions are an inevitable part of an organization's journey. The departure of a Chief Executive Officer (CEO) often marks a significant milestone, triggering a ripple effect throughout the company. The fact that in recent years CEOs are stepping down at record-high rates has a tremendous impact not only on the organization, its stakeholders, the Board but also the industry and, not so uncommon, world markets.
Why are CEOs stepping down?
Major distortions shaking industries all over the world including Brexit (resulting in supply chain crisis), the pandemic, and the war in Ukraine (with consequential growing inflation) contributed to growing pressure put on CEOs leading to an increasing number of departures. Macro factors applying additional weight to companies including the ability to work remotely or hybrid, people contemplating the rightness of their professional choices, and trying to find balance in the new reality (leading quite often to The Great Resignation) have a direct influence on how companies operate and how do they perform including the top leadership. CEOs have been striving to find solutions to these new challenges, at the same time trying to meet growing expectations such as leading organizations towards net zero targets or barreling energy crisis. Other factors contributing to CEO rotation include “natural succession”- the generation of Baby Boomers at the end of their careers and slowly reaching retirement.
All of these pressures hit ultimately the boardroom, making the Boards worldwide question whether they have the right person in place at the top (Conmy, 2023), or whether they will be in a position to fulfill it.
Industries mostly affected by CEO turnover
According to the Challenger, Gray & Christmas, Inc. report in total, 395 CEOs left their positions during the first quarter of 2022—marking the highest quarterly total since Q1 2020, which had 441 recorded CEO exits.
O'Loughlin (2023) shares the list of Fortune 100 companies plus every other CEO exit at companies with 1000+ employees stepping down since 2020. Industries leading the CEO turnover include government/non-profit entities in March 2022 with 35, for a total of 91 so far that year. That is a 75% increase over the same period in 2021 when 52 CEOs left their posts in this sector (Challenger, Gray & Christmas, Inc.). These are being closely followed by technology companies that saw 38 CEO changes in the first quarter of 2022, up 27% from the 30 who left their posts in this industry in the first quarter of 2021. Similarly, high numbers saw healthcare firms with 34 CEOs leaving their posts, down 17% from the 41 CEO exiting in Q1 2021.
Female CEO rotation
As stated in Challenger, Gray & Christmas, Inc. report (2022) there is a considerable growth noticed in the rate of women taking over the incoming CEO roles (26% in 2022, up from 25% in the first quarter of 2021). Of outgoing CEOs, 21% of the 395 CEOs who left their posts were women (March 2022), compared to 19,6% in all of 2021.
The impact and how to best navigate the CEO transition
The impact of CEO departures affects not only the organization and its stakeholders but the overall market including reactions in the financial markets, with stock prices and investor sentiment responding to the news.
Study analysis conducted by Dherment-Férère and Renneboog (2000) reveals that there is a direct relation between the share price reaction and changes in top management. A distinction was made among different types of CEO turnover: forced resignation, voluntary departures and age-related retirements. A forced CEO resignation is hailed favorably by the market with a small but significant positive abnormal return of 0.5%. Voluntary resignations do not cause a price reaction, age-related turnover triggers a small negative price reaction. The major trigger resulting in changes on the world market concerns the successors themselves, and to be more detailed their “origin” (internal versus external candidature). Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2% (Dherment-Férère, Renneboog, 2000).
There exists a direct impact of the CEO’s departure on the organizational culture. With new leadership, the expectation is that an organization's culture will to some extent re-shape because of fresh perspectives and a different approach. This as a consequence may also affect employee morale. Temporary insecurity and a mix of emotions are natural reactions to leadership transition across all organizational levels. In order to reduce these risks, each leadership transition needs to be strongly supported with effective communication reassuring the state of things and minimizing any disruptions.
Similarly, to employees’ responses, investors’ reactions are equally crucial and need to be taken care of. This is especially important in a scenario where investors’ confidence is shaken by the enforced CEO transition. To diminish any negative effects and maintain trust, transparent communication, and a solid transition plan are essential.
Next to prioritizing effective communication strategies, establishing a robust succession plan that identifies potential hiccups and allows successors smoothly transition to the leadership role with the minimum disruption for the organization is crucial. This is where The Board comes in place. Finding a successor who can provide continuing, long-term value to the brand, who erns sympathy among shareholders, with the skills, experience and patience to deal with rough patches is not an easy task, though not one a well engaged and competent Board should not be prepared for.
A thorough understanding of what is the role of the Boards in designating CEO, and how the process fits into governance structure is offered in a diploma in Corporate Governance programme.
CEO transitions are pivotal moments that shape the trajectory of organizations. Understanding the reasons behind these departures and their impact on various stakeholders is crucial for navigating these transitions successfully. By utilizing resources such as succession planning, professional development, change management methodologies, and effective communication strategies, organizations can adapt and thrive during times of leadership change. Embracing these transitions as opportunities for growth and renewal can set the stage for a brighter future.
Resources:
Challenger, Gray & Christmas, Inc. (2022) CEO Exits Hit 119 In March 2022; Q1 Exits Up 29% Over Same Period Last Year Available on: https://www.challengergray.com/blog/ceo-exits-hit-119-in-march-2022-q1-exits-up-29-over-same-period-last-year/ (Accessed on: May 12th 2023)
Conmy, S. (2023) CEOs are burned out and leaving, The Corporate Governance Institute, Available on: https://www.thecorporategovernanceinstitute.com/insights/news-analysis/ceos-are-burned-out-and-leaving/ (Accessed on: May 15th 2023)
Dherment-Férère, I., Renneboog, L.D.R. (2000) Share Price Reactions to CEO Resignations and Large Shareholder Monitoring in Listed French Companies, Tilburg University, Available on: https://pure.uvt.nl/ws/portalfiles/portal/536250/70.pdf (Accessed on: May 12th 2023)
O'Loughlin, H. 2023) Every Major CEO Stepping Down: 2020-2023 Available on: https://buildremote.co/companies/ceos-stepping-down/ (Accessed on: May 12th 2023)