CEO Succession Practice Trends: What to Know
CEOs have faced numerous challenges in recent years: a catastrophic pandemic, shifts to remote work (and back again), supply chain disruptions, and a floundering economy. As a result, many have placed succession plans on the back burner, ensuring that leadership remained intact to navigate the company through choppy seas.
However, as the world has begun to stabilize, CEO turnover has started to increase once more. However, current CEO succession practices highlight some interesting trends. Here’s what you need to know.
Poorly Performing Companies Are Holding On to Their CEOs
Companies that witnessed a decline in their stock’s value from 2020 through 2022 are holding onto their CEOs. According to data from The Conference Board, no CEOs at companies with poor stock performance were dismissed between 2020 and 2022. In contrast, nearly 11% of CEOs at companies in the Russell 3000 and S&P 500 were let go in 2019.
It’s likely that organizations are cautiously holding onto their CEOs until they can determine whether their newly introduced strategies require time before showing benefits. After all, the numerous macroeconomic shocks businesses experienced weren’t caused directly by executives, and stock performance may take time to recover.
The reduction in forced dismissals is consistent across multiple industries, including retail, information technology, and consumer staples. However, if poor stock performance continues throughout 2023 and 2024, we may see an increase in CEO dismissals.
While Diversity Initiatives Touched Lower Rungs of the Corporate Ladder, They Haven’t Reached Executives
Many companies initiated new DE&I policies designed to increase diversity and inclusion in the workplace following the social unrest experienced in 2020. Most DE&I policies focus on hiring team members from diverse backgrounds and improvements to the work culture, like required diversity training programs.
However, the emphasis on diversity hasn’t yet extended to the upper echelons of management. The overwhelming majority of CEOs are white and male. Approximately 6% of Russell 3000 and S&P 500 CEOs are female.
Gender diversity among CEOs is significantly lower for companies in the information technology, financial services, and energy sectors. In those industries, females comprise between 3 and 4% of sitting CEOs.
While diversity among executives is extremely low, that may change in future years. Remember, most companies held onto their executives during the pandemic years, so substantial improvements in diversity were minimal. As baby boomer executives retire, we may see more female and ethnically diverse CEOs across industries.
Innovative Sectors Are Choosing Younger CEOs
According to research from The Corporate Board, the average age of CEOs is 58.
However, companies in forward-thinking industries like information technology and healthcare are selecting younger people for their CEO roles. For instance, Brett Taylor, the CEO of Salesforce, is 41, and Apollo Medical’s CEO is only 28.
Variations in CEO age are common across industry sectors. For example, CEOs in financial services, manufacturing, and energy typically have the oldest executives. An organization’s annual revenue tends to correlate with CEO age, with higher-earning companies of $50 billion tending toward older CEOs.
Still, companies are hiring younger CEOs at increasing rates.
The percentage of CEOs between the age of 40 and 49 increased to 15% in 2022, up from only 12.9% in 2017. In comparison, CEOs aged 55 to 59 dropped from 30.2% to 27.7%.
Increase in CEO Departures Due to Death and Illness
According to data from The Corporate Board, there was an increase in CEO departures caused by death or illness between 2020 and 2022. The reason for the departures was likely COVID-19 or complications caused by the disease. However, unexpected death or illness is always a concern — especially among older executives.
The increase in CEO deaths and illnesses highlights the importance of a CEO succession plan. Companies that don’t have succession plans in place for their top executives risk serious issues if their CEO suddenly becomes incapacitated.
Debates about disclosing the CEO’s current health to shareholders have also arisen amid the rise in CEO death and illness. After all, an unexpected CEO departure can massively impact a stock’s value. Proponents of the idea thus believe that it is crucial to include such details in annual reports. However, this also reduces the CEO’s privacy.
Unsurprisingly, the highest number of CEO departures due to death and illness occurred among older CEOs in industries like manufacturing and energy.
As these types of companies are more likely to have CEOs above the age of 58, they also bear the burden of potential health problems among executives.
Companies Are Promoting More Company Insiders to the CEO Role
In the past, many companies looked outside their organization for their executives. There seems to be a reversal to that trend, with more businesses sourcing their CEOs from within the ranks of their organization. Reasons for internal promotion aren’t entirely clear, but it’s likely due to factors like:
- Candidates’ internal company knowledge: Many firms have experienced significant change in recent years due to the pandemic and other macroeconomic factors. As a result, hiring a CEO with knowledge of those changes could be highly beneficial.
- Familiarity with the organization’s work culture: Some companies have unique work cultures, making bringing someone new on board challenging if they’re unfamiliar with how the organization does business.
Insider hiring for the CEO role remains steady across all industries, including information technology, manufacturing, financials, and industrials. The Corporate Board found no correlation between insider hiring and annual company revenue.
Succession Trends Highlight that Companies Are Hiring Younger, and They Want Familiarity
While the CDC formally ended the public health emergency for COVID-19 in May 2023, some companies are still recovering from its impact. Other crises, like social unrest, supply chain disruptions, and economic uncertainty, are driving many organizations to replace retiring CEOs with internal candidates rather than looking outside the company.
And though CEOs remain mainly white and male, there are signs that companies will incorporate more diverse hiring practices into their future executive teams. As older executives retire, organizations will likely widen their scope to include more CEOs who are young, female, and from diverse backgrounds.
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