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Firing employees can be costly to companies, but have you ever wondered what happens when a CEO suddenly leaves the company?
According to a study by Strategy&, when a CEO turnover is forced rather than planned, it is estimated that US$112 billion is lost in the year leading up to and the year following the turnover.
Analysing 2,500 of the world’s largest companies, the median total shareholder return is also seen to drop to -13% in the year leading up to the forced turnover compared to only -0.5% in a planned succession.
In the year after the forced turnover, the return only recovers to -0.6% compared to -3.5% in planned successions.
“While firing the CEO can be the right call, it’s enormously costly. When you quantify the cost of turnovers, particularly forced ones, you get a strong sense of the importance and payoff involved in getting CEO succession right,” Per-Ola Karlsson, report co-author and Senior Partner at Strategy& said.
The report highlighted, thankfully, that planned CEO turnovers are on the rise, climbing from 63% in the 2000 to 2002 period to 82% in the 2012 to 2014 period.
“When companies do succession planning right, they make CEO governance an ongoing agenda item at board meetings, and work to get in front of issues before they become disruptive,” Ken Favaro, Senior Partner at Strategy& said.
“Hundreds of billions of dollars in potential future value will depend on how well the world’s largest companies can improve their succession practices in coming years.”
Almost eight out of 10 (78%) of companies undergoing planned succession last year have promoted someone to fill the role of CEO.
“This is a healthy rate for insider successions – and insiders give companies some advantages. Our research shows that outsider CEOs have been forced out of office – a costly event – 44% more often than insiders,” Favaro added.