Skip to main content
Jul 23, 2020

World’s largest firms failing on succession-planning disclosures

Inaugural study from SquareWell on CEO dismissals and appointments also notes disparity between company disclosure around departures and researchers’ analysis

Seventy-three of the world’s largest companies saw a CEO change between January 2019 and June 2020, but firms are failing when it comes to reporting around this most important of company positions. 

That is the finding of the inaugural report from SquareWell Partners, titled CEO dismissals & appointments at the world’s largest companies. In it, SquareWell reports that just a fifth of companies provide comprehensive disclosure of their succession plans, while 85 percent fail to provide ‘adequate disclosure about how the new lead executive was selected’.

‘In the area of succession planning, this has always been a highly sensitive topic,’ Luca Giacalone, senior ESG analyst at SquareWell and author of the report, tells IR Magazine. ‘CEO successions have been traditionally surrounded by a culture of secrecy, with companies keeping names of potential successors secret until the announcement of a new appointment is made.’ 

He adds that while it’s understandable that companies might want to keep the process confidential, ‘companies might be misinterpreting investors’ expectations. While investors do expect clarity on the succession-planning process, they understand the sensitivity of CEO succession and do not expect companies to provide detailed information on the state of succession planning.  

‘What investors are interested in is evidence that the board is carrying out this key responsibility effectively – and that it is ready to ensure a successful transition.’

There is less justification when it comes to poor reporting around the selection process, however. ‘The lack of disclosure may be due to companies trying to hide a poor selection process because there is no real reason for companies not to disclose the process after the fact,’ notes Giacalone. ‘In some cases, the board may be found unprepared to conduct a search for a new CEO, with few internal options available and no clear overview of which candidates might be available externally.’

Good disclosure 

Tracking 500 companies listed on the main stock indexes across three regions – continental Europe (284 companies), the UK (100) and the US (100) – SquareWell examined annual reports and proxy statements released before a company announced that its lead executive (CEO, chair and CEO or executive chair) would be departing. 

SquareWell cites two examples of good disclosure around succession planning. The first is IBM, which used its 2019 proxy statement to tell investors and analysts about how its board reviews company succession plans for all senior positions, including the CEO, on an annual basis. As part of this evaluation, the company reviews both external candidates and the ‘development plans for the next generation of senior leadership,’ notes SquareWell. 

The second company to get a mention is French pharma firm Sanofi, which disclosed in its 2018 annual report that the succession plan for its CEO is ‘systematically reviewed’ by the appointments, governance & CSR committee, and that this committee works closely with the CEO to, among other things, monitor that ‘high-potential internal prospects receive appropriate support and training.’

Arvind Krishna took over from Ginni Rometty as IBM CEO in April 2020, while Sanofi named Paul Hudson as CEO in September 2019, when Olivier Brandicourt retired.

The right fit

When it comes to the CEO recruitment process, SquareWell cites aerospace giant Airbus and Dutch materials firm Koninklijke DSM as examples of good disclosure. ‘Strong disclosure should provide insight as to whether the board considered both internal and external candidates as well as give insight as to what type of profiles were sought,’ says SquareWell – something seen at both these companies. 

Guillaume Faury was appointed CEO of Airbus in April 2019, taking over from Tom Enders, while Koninklijke DSM named Geraldine Matchett and Dimitri de Vreeze as co-CEOs, taking over from Feike Sijbesma in December 2019. 

Explaining its decision to appoint co-CEOs, Koninklijke DSM said the ‘dual leadership structure is rooted in the long history of collaboration between [Matchett and de Vreeze], which has been keenly observed by the supervisory board and is expected to create a strong basis for continued profitable growth.’

Interestingly, just 12 percent of new lead executives appointed at the companies studied had previous CEO experience at a listed company. Almost a quarter of companies with an outgoing lead executive appointed an interim CEO – with 53 percent of those companies choosing their CFO to serve in the role. 

You’re fired!

The study also looks at the reasons given for CEO turnover. According to companies’ own disclosures, the most common reason for departure is ‘resignation’, finds SquareWell, with only 7 percent of firms saying they had ‘dismissed’ their lead executive due to poor performance, a scandal and/or strategic disagreement.

Research by the shareholder advisory firm finds that this might not always accurately reflect the true situation, however. ‘Our analysis suggests that a number of departures classified as ‘resignations’ are in fact dismissals due to poor performance, a scandal and/or strategic disagreement,’ writes Giacalone in the report. 

‘More specifically, SquareWell’s analysis shows that 29 percent of all outgoing lead executives can be considered as ‘dismissed’ versus 7 percent if relying only on companies’ disclosures.’

Share price also has an impact on whether or not a lead executive is likely to be dismissed. For the 42 percent who oversaw a share price increase of more than 100 percent during their tenure, dismissal happened only ‘in the event of a scandal or strategic disagreement’. Where there was a poor share price performance, however, SquareWell’s research shows that the most common reason for departure was dismissal.

‘Negotiating the departure of a CEO is never going to be easy for either party,’ Giacalone says. ‘An amicable agreement will give the impression that both parties reached a decision that was mutually beneficial, where the reality might be that one party is missing out. The motivation for both the company and the executive is to present the departure in the most favorable light possible to avoid any reputational damage.

‘The benefits for ‘hiding’ the disagreements is quite clear, so we don’t think this will change unless there is increased investor pressure for transparency or regulation.’

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...