Stanford Closer LOOK series

Succession losers

What happens to executives passed over for the ceo job?

By David F. Larcker, stephen a. miles, and Brian Tayan
october 11, 2016

introduction

Succession candidates

Shareholders pay considerable attention to the choice of executives

One approach to evaluating the quality of a companys selection

selected as new CEOs whenever a change in leadership takes place.

process is to consider the executives who were passed over for the

Although it is not precisely known how large a contribution an

CEO role. When large corporationssuch as Boeing, Disney, or

individual CEO makes to the success of an organization overall,

Bank of Americahave a succession event, there is no shortage

the general perception is that the CEO is crucial to long-term

of pundits and journalists speculating which executives (internal

performance, and shareholders are interested to know that the

or external) are poised as leading contenders to take over. In the

most qualified candidate has been identified among those vetted

end, only one executive emerges with the job. What happens to

for the top job during a succession event.1

those who were not selected (i.e., the succession losers)? If they

However, to the outside world, the CEO selection process

go on to great success as the CEOs of another company, their

might be characterized as a black box. Shareholders and the

previous company might have missed out on a highly qualified

public alike do not know when a succession event might occur,

candidate. Conversely, if they perform poorly as CEO of another

who the leading candidates are, whether the corporation has

company or remain stuck in positions below the CEO level, their

adopted a rigorous process to develop and evaluate them, and

previous company might have made the correct succession choice.

whether the most qualified person was ultimately selected. While

the research literature does not shine a clear light on these issues,

all CEO succession events among the largest 100 corporations

the available evidence is not particularly encouraging. One survey

between 2005 and 2015. Our total sample included 77 companies

of corporate directors finds that most admit to not having detailed

and 121 transitions. Some companies, such as FedEx and Amazon,

knowledge of the skills, capabilities, and performance of senior

had no succession events during this period, while others, such as

executives just one level below the CEO. Only half (55 percent)

the Home Depot and General Motors, had multiple successions.

of respondents claim to understand these skills either well or

Mutual companies were excluded from the sample because they

very well. Most directors (77 percent) do not participate in the

lack publicly traded stock price information.

performance evaluation of executives one level below the CEO,

and only in rare circumstances (7 percent) do board members

two sets of information.

formally serve as mentors to them.2 Furthermore, research shows

that inadequate talent development and succession planning

senior-level executives named in media articles as potential

negatively impact future corporate performance. For example,

successors to the outgoing CEO prior to the event.4 Of the 121

Behn, Dawley, Riley, and Yang (2006) find that the longer it takes a

total transitions that occurred during the measurement period,

company to name a successor, the worse it subsequently performs

46 (38 percent) had only one named successor, and no executives

relative to peers.

were identified as passed over. For example, when William

To ensure the long-term success of a corporation, shareholders

Harrison Jr. stepped down as the CEO of JPMorgan Chase in

therefore want assurance that the board has a sound process in

2005, Jamie Dimon was the sole candidate speculated to take over.

place to evaluate, develop, and identify the most promising talent.

However, the remaining 75 transitions (62 percent) had more

However, without an inside look at the leading candidates to

than one named successor, and 100 executives at these firms were

assume the CEO role, how can shareholders tell whether boards

identified as passed over.

are making correct choices?

Stanford Closer LOOK series

To provide some initial insight into this question, we studied

Among the 77 companies with a succession event, we collected

Sample 1. The first sample includes the names of all internal,

Of these 100 executives, 26 percent chose to remain at the

1

Succession Losers

company, and 74 percent left. Among those who left, 30 percent

that recruit external CEOs tend to be in worse financial condition

eventually went on to become the CEO of another company.5 For

than those that promote an internal executive. The very fact

example, Ed Shirley who was passed over as the CEO of Procter &

that they go to the external market to hire a CEO suggests that

Gamble in 2009 became the CEO of Bacardi, and Sheri McCoy who

no internal candidates are viable or that the company requires

was passed over as the CEO of Johnson & Johnson in 2012 became

wholesale changes that an internal candidate is less likely to be

the CEO of Avon Products. Most executives who are passed over,

able to achieve. All succession losers who join another firm as CEO

however, do not become CEO at other firms. Forty-one percent

are, by definition, external hires and fall under this qualification.8

either take a position below the CEO level, join an advisory or

In our sample, the companies that hired succession losers also

financial firm, go into private equity or venture capital, or start an

exhibited negative relative stock-price performance for the six

independent consulting firm. Thirty percent fully retire, although

months prior to hiring them.

many of these continue to work in retirement by serving on the

boards of other corporations.

corporate boards do a reasonable job of identifying CEO talent.

Nevertheless, in aggregate, our data modestly suggests that

senior-level

Fewer than 30 percent of the executives passed over among large

executivessuch as the CFO, COO, and divisional presidents

corporations are recruited by other firms as CEO. Most (over 70

who were not named as potential successors in the media but

percent) are not. If an executive who is passed over has valuable

who resigned their position within the year preceding or the year

skills that make him or her a viable CEO candidate, it is likely

following a succession event. (We collected information on this

that another corporation would identify and hire that individual.

sample of executives because media articles are not definitive, and

This is especially true if the market for CEO talent is as tight

prominent executives who are not externally identified as CEO

as suggested by firms such as McKinsey & Co. that argue that

candidates might still be candidates or consider themselves to be

companies are in a war for talent.9

potential candidates.)6

In total, we identified 34 additional prominent executives

after being passed over appear to perform worse (relative to

who departed shortly before or after the succession. Of these,

benchmarks) than those who were selected at the original

24 percent eventually became the CEO of another company, 41

company. While it is important not to overweigh these results

percent joined another company in a position below the CEO

because of the qualifications mentioned above, the magnitude

level, and 24 percent permanently retired. The remaining 12

of the difference between their performance suggests that board

percent resigned too recently to determine whether they fully

members might be more adept at evaluating CEO-level talent

retired or will join another firm (see Exhibit 1).

than the broad research literature indicates.

Sample

2.

The

second

sample

includes

Performance. Finally, we studied the stock price performance

Furthermore, candidates who are recruited to new firms

of the succession winners against that of the executives who

Why This Matters

became the CEO of another publicly traded firm after being

1. CEO succession events among major corporations garner

passed over.7 We identified 17 such individuals. On average, the

considerable external scrutiny from shareholders and the

succession winners saw 3-year, cumulative stock price returns

media. Are the executives ultimately selected for the role

that were approximately equal to the S&P 500: These companies

really better than those passed over? What information

returned 8 percent cumulatively, on average2 percentage points

can shareholders use to assess the decisions made by the

below the index level. By contrast, the executives who became

board? What types of disclosures might a firm release to help

CEO at another company oversaw a 3-year, cumulative loss of 13

shareholders feel comfortable with the succession process?

percent, on average, compared to a 10 percent gain in the S&P

2. The data suggests that only a small number of executives who

500a 22 percentage point differential (see Exhibit 2).

are passed over as CEO become CEO at another company.

What implications does this have on understanding the breadth

Although it is tempting to conclude that succession losers

are associated with poor subsequent performance (perhaps

and depth of the labor market for executive talent?

justifying the fact that they were not selected as CEO by their

3. The data also shows that those who lose out in internal

original company), one extremely important caveat is in order.

succession races generally do not perform as well at new

The research literature routinely shows that companies that hire

companies as those who were instead selected. Is this due to

external CEOs tend to perform worse than those who promote

differences in the operating conditions of companies that require

internal executives. One reason for this result is that companies

an external rather than an internal hire? Or does it suggest

Stanford Closer LOOK series

Succession Losers

that board members are better at identifying and assessing the

quality of CEO talent than other research generally suggests?
A survey of corporate directors found that, on average, directors be-

lieve that 41 percent of a companys overall performance is directly

attributable to the efforts of the CEO. Scientific research on this topic
is considerably varied with estimates ranging from approximately 4
percent to 35 percent, depending on methodological assumptions. See
Heidrick & Struggles and the Rock Center for Corporate Governance at
Stanford University, CEOs and Directors on Pay: 2016 Survey on CEO
Compensation, (2016). For a review of the research literature on CEO
performance, see David F. Larcker and Brian Tayan, CEO Attributes and
Performance, Quick Guide Series: Research Spotlight (2016), available
at: http://www.gsb.stanford.edu/faculty-research/publications/
ceo-attributes-firm-performance.
2
The Conference Board, The Institute of Executive Development, and
the Rock Center for Corporate Governance at Stanford University,
How Well Do Corporate Directors Know Senior Management? The
Conference Board Governance Center, Director Notes (2014).
3
Bruce K. Behn, David D. Dawley, Richard Riley, and Ya-wen Yang,
Deaths of CEOs: Are Delays in Naming Successors and Insider/
Outsider Succession Associated with Subsequent Firm Performance?
Journal of Managerial Issues (Spring 2006). See also, David F. Larcker and
Brian Tayan, Sudden Death of a CEO: Are Companies Prepared When
Lightning Strikes? Stanford Closer Look Series (March 6, 2012).
4
This approach assumes that media speculation is somewhat valid. We
are not aware of other public data sources where potential successors
are identified.
5
This includes publicly owned, privately owned, private-equity backed,
venture-capital backed, and other startup companies. This does not
include consulting or advisory firms founded by the departed executive.
6
The two samples are kept separate because executives in sample 1 might
choose to remain at the company, while all executives in sample 2 left
(by definition). Note that it is impossible to determine whether a seniorlevel executive leaving close to a succession event did so voluntarily or
involuntarily.
7
Here we combine executives from sample 1 and sample 2 because they
all become CEO. Executives who become CEO of private companies are
excluded because stock price information is not available.
8
By comparison, 82 percent of the CEO winners in this subsample were
internal hires, while 19 percent were external hires.
9
See Elizabeth G. Chambers, Mark Foulon, Helen Handfield-Jones,
Steven M. Hankin, and Edward G. Michaels III, The War for Talent,
McKinsey Quarterly (1998).

The Stanford Closer Look Series is a collection of short case

studies that explore topics, issues, and controversies in corporate
governance and leadership. The Closer Look Series is published
by the Corporate Governance Research Initiative at the Stanford
Graduate School of Business and the Rock Center for Corporate
Governance at Stanford University. For more information, visit:
http:/www.gsb.stanford.edu/cgri-research.
Copyright 2016 by the Board of Trustees of the Leland Stanford Junior
University. All rights reserved.

David Larcker is Director of the Corporate Governance Research

Initiative at the Stanford Graduate School of Business and senior faculty
member at the Rock Center for Corporate Governance at Stanford
University. Stephen Miles is Chief Executive Officer, The Miles Group.
Brian Tayan is a researcher with Stanfords Corporate Governance
Research Initiative. Larcker and Tayan are coauthors of the books
Corporate Governance Matters and A Real Look at Real World
Corporate Governance. The authors would like to thank Michelle
E. Gutman for research assistance in the preparation of these materials.

Stanford Closer LOOK series

Succession Losers

Exhibit 1 succession losers (2005-2015)

Sample 1: Named Successors

121

Transitions: one named successor

46

38%

Transitions: more than one named successor

75

62%

100

Of these, number who stay

26

26%

Of these, number who leave

74

74%

Leave who become CEO at another company

22

30%

Leave who become executive (below CEO) at another company

30

41%

Leave who permanently retire

22

30%

Transitions: total

Number of executives passed over for CEO job

Sample 2: Other Executives

34

Leave who become CEO at another company

24%

Leave who become executive (below CEO) at another company

14

41%

Leave who permanently retire

24%

Unknown (left too recently to determine)

12%

Number of other executives who leave around succession

Note: Named successors are executives who are named in newspaper articles as potential leading candidates to succeed the outgoing CEO. Executives who
leave to become CEO at another company do not include those who start their own company. Executives who retire include those who continue to serve on or
join new corporate boards but do not contract with a new full-time employer. Sample 2 includes senior executives not named in articles as potential successors
but who leave within approximately 15 months before or after a succession event.
Source: Research by the authors.
.

Stanford Closer LOOK series

Succession Losers

Exhibit 2 succession winners and losers: stock price performance

Stock Price Performance

Succession losers who become CEO at another public company

17

Stock price performance

3-year cumulative return

3-year cumulative return, S&P 500
3-year cumulative return, relative to S&P 500

-13%
9%
-22%

Succession winners of the original company

16

Stock price performance

3-year cumulative return

8%

3-year cumulative return, S&P 500

10%

3-year cumulative return, relative to S&P 500

-2%

Note: Sample excludes executives who become CEO of a privately owned, private-equity backed, venture-capital backed, or startup company. Sample of
succession winners includes only companies where succession losers went on to become CEO of another public company. In one case more than one succession
loser went on to become CEO of another public company. Stock price performance calculated as the 3-year change in price from the executives first day as CEO,
or ending on December 31, 2015 for CEO tenures that began less than 3 years before this date. S&P 500 and relative performance calculated for each executive
over the same date range. S&P 500 returns differ across subsamples because succession winners and losers begin their CEO tenure on different start dates.
Source: Stock price information from Center for Research in Securities Prices (University of Chicago). Calculations by the authors.
.

Stanford Closer LOOK series