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TA B LE O F CO NTE NT S
Executive Summary and Key Findings............................ 1
Methodology....................................................................... 4
Review of Findings.............................................................. 5
Demographic Information.............................................. 13
Acknowledgments........................................................... 21
Contact Information....................................................... 22
EXECUTIVE SUMMARY AND KEY FINDINGS
CEO TALENT IS EXCEPTIONALLY SCARCE
TIGHT LABOR MARKET DRIVES CEO PAY HIGHER
BOARDS FACE GREATER URGENCY TO IDENTIFY, DEVELOP, AND RETAIN CEOS
Talent is scarce, the job is rough, and the runway for Accurately assessing the scarcity of executive talent is
success narrower every day.1 one of the great unanswered questions in governance,
adds Nick Donatiello, lecturer in corporate governance at
I have never seen the CEO labor market tighter.2
Stanford Graduate School of Business. The feedback we
New research by Stanford Graduate School of Business and received from the very board members who are responsible
The Rock Center for Corporate Governance finds that the for making hiring decisions is that the number of highly-
qualified pool of CEO talent to run the largest publicly traded talented CEOs is very limited. Recent succession challenges
companies in the United States is incredibly small, according at major corporationssuch as General Electric, Walt Disney,
to the directors who sit on the boards of these companies. and Uberare indicative of an extremely tight labor market
The average director of a Fortune 250 company estimates for CEOs. Frankly, there is a lot of pressure on directors to
that fewer than 4 peopleincluding those both inside and get it right. This likely results in directors being risk averse,
outside their companywould be capable of stepping into which of course only serves to narrow their view of who
the CEO role today and running it at least as well as their might be acceptable.
current CEO. They estimate that only 6 executives could
perform as well as the CEO of their biggest competitor According to Brian Tayan, researcher at Stanford Graduate
and only 9 would have the skills required to turn around a School of Business, It is not just the size and complexity of
company struggling in their industry. the corporation that make succession difficult. A candidate
might meet all the criteria in terms of background and
Almost across the board, directors of the largest publicly experience, but it is still hard to tell whether they have what
traded U.S. companies believe that the available pool of it takes to succeed. Corporations with a visionary founder
qualified CEO talent in their industry is small, the issue of have the added challenge of planning to replace CEOs who
fit difficult to get right, and the downside risk of making have in many ways come to define their organization.
the wrong choice high, says Professor David F. Larcker of
Stanford Graduate School of Business. These findings have In the summer of 2017, Stanford Graduate School of Business
profound implications for talent development and CEO and The Rock Center for Corporate Governance surveyed
compensation: How you groom senior executives, how you 113 directors of Fortune 250 companies and 18 prominent
plan for a CEO transition, and how you structure CEO pay executive recruiters and compensation consultants that
really hinge on just how available replacement talent is. advise these companies to understand their views on the
labor market for top CEO talent.
1. Total number of corporate boards (public and 2. Number of years serving on the board of a Fortune
private) currently serving on. 250 company.
Average Median Average Median
3 2 10.5 9
3. In general, how challenging is the job of CEO at your 5. How many people, including those both inside and
company? outside their company, are capable of stepping into
the CEO role at your biggest competitor and doing at
59% least as well as their current CEO?
Extremely challenging
6%
39%
There is no one who could do it as well
Very challenging
68%
1%
Fewer than 5 people
Moderately challenging
20%
0%
Between 6 and 15 people
Slightly challenging
4%
1%
Between 16 and 50 people
Not at all challenging
2%
15% 6.2
There is no one who could do it as well
73%
Average
8.9
Most frequently cited CEOs (unaided) Most frequently cited industry (unaided)
35% 41%
n There is no one who could do it as well n Fewer than 5 people n Between 6 and 15 people
n Between 16 and 50 people n More than 50 people
66%
Average
27%
2.0
6%
2%
0%
53%
Average
35%
9% 3.0
2%
1%
59%
Average
30%
6% 3.4
3%
2%
5%
Average
74%
19% 5.0
3%
0%
9%
Average
65%
23% 5.2
3%
0%
22%
Average
43%
22% 8.0
9%
3%
14%
Average
45%
30% 8.3
8%
3%
8%
Average
46%
34% 8.7
10%
1%
1%
Average
33%
55% 10.8
7%
4%
1%
Average
38%
42%
11.9
15%
3%
3%
Average
33%
41%
13.3
19%
4%
2%
Average
25%
52%
13.6
19%
3%
0%
Average
27%
51%
13.7
19%
3%
0%
Average
29%
46%
14.7
20%
6%
0%
Average
33%
40%
15.3
21%
7%
In our industry, having general-management expertise is In our industry, you can win if the CEO is among the top
critical for being a successful CEO. three. He or she doesnt need to be number one.
Average Median Average Median
7.3 8.0
8.5 9.0
It is impossible to be the top company in our industry
In our industry, having industry-specific expertise is without having the top CEOs in our industry.
critical for being a successful CEO.
Average Median
Average Median
7.2 8.0
8.2 9.0
CEOs in our industry have leverage over pay packages
because talent is scarce.
CEOs in our industry have specific skills that are
Average Median
extremely hard to replicate.
Average Median
7.0 7.0
7.5 8.0
6.2 6.0
Its very challenging to recruit top CEO talent. There are better private equity opportunities for experienced
CEOs.
There seems to be a big experience gap for CEO talent.
Companies want an experienced CEO, not a first-time CEO. Boards need to start ignoring activists. Most activists think
CEO turnover is good, but it destabilizes large parts of the
The CEO role is difficult and increasingly complex. Finding organization. Excessive CEO turnover is leading to candidates
truly qualified talent in recent years has gotten more difficult. that are missing key experiences.
Talent is scarce, the job is tough, and the runway for success I am less concerned about talent being available than I am
narrower every day. about the cultural fit of outside talent.
Difficult to vet and costly if you make a mistake. Succession planning is the key to creating the talent. It does
not happen by chance. Winning results from a long-term
The risk of selecting the wrong candidate is greater than strategy and growing and developing talent is part of the job.
any time in the past. It is not rocket science.
CEO talent is very difficult to identify by resume, particularly One of the largest succession questions is, how do you
for mega-cap companies. There just arent that many people prepare an internal candidate?
who have done the job.
Even internal candidates can deviate from expectations
It is hard to judge talent before it is challenged. Many can once they are in the big job.
run a company if things are going well and the economy is
healthy. The real test is when things arent going well and the Data continues to prove internal CEO hires outperform
economy is not supportive. external hires. Understanding the company culture and how
the company actually works allows newly hired CEOs to build
Tenure has shortened so that the CEO must win immediately far more rapidly, resulting in stronger corporate performances.
and that makes long-term decision making difficult. Extensive, long-term succession planning allows qualified
talent to prepare for the complexities of the CEO position.
I have never seen the CEO labor market tighter. With
traditional industries such as retail, restaurant, and packaged CEOs are made not born. The talent is out there, you just
goods under such pressure to transform, the pool of available need to identify it, bring it in and nurture it. Leadership
candidates is small. There is no such thing as stepping into a ability, judgment, and problem solving skills are the key.
CEO role.
Everyone is replaceable.
44% 56%
67%
Extremely challenging
28%
Very challenging
6%
Moderately challenging
0%
Slightly challenging
0%
Not at all challenging
33%
Fewer than 5 people
22%
Between 6 and 15 people
11%
Between 16 and 50 people
33%
More than 50 people
39%
Fewer than 5 people
22%
Between 6 and 15 people
22%
Between 16 and 50 people
17%
More than 50 people
n There is no one who could do it as well n Fewer than 5 people n Between 6 and 15 people
n Between 16 and 50 people n More than 50 people
56%
Average
31%
2.3
13%
0%
0%
44%
Average
31%
3.4
25%
0%
0%
38%
Average
56%
0%
3.8
6%
0%
6%
Average
31%
56% 8.6
6%
0%
13%
Average
56%
19% 8.8
6%
6%
6%
Average
25%
63% 9.1
6%
0%
19%
Average
38%
31% 9.4
6%
6%
13%
Average
44%
25% 10.0
19%
0%
13%
Average
44%
25%
11.1
13%
6%
0%
Average
25%
63%
11.1
13%
0%
0%
Average
31%
50%
12.1
19%
0%
13%
Average
25%
44%
12.4
13%
6%
0%
Average
31%
50%
13.2
13%
6%
0%
Average
38%
31%
16.7
19%
13%
0%
Average
31%
38%
17.1
19%
13%
(Scale of 1 to 10, 1 = does not at all reflect my point of view; 10 = completely reflects my point of view)
CEOs have specific skills that are extremely hard to CEOs have leverage over pay packages because talent is
replicate. scarce
Average Median Average Median
Having general-management expertise is critical for being Having industry-specific expertise is critical for being a
a successful CEO. successful CEO.
Average Median Average Median
You can win if the CEO is among the top three. He or she It is impossible to be the top company without having the
doesnt need to be number one. top CEOs in our industry.
Average Median Average Median
6.6 6.5
8.0 8.0
Top executives have so much unvested equity that it is
hard to recruit them to another company.
It is difficult to evaluate prospective CEO talent during a
search process because a candidate might meet all the Average Median
criteria in terms of previous work experience but it is still
hard to tell whether he or she would be a successful CEO.
Average Median 6.2 6.5
7.6 8.0 CEOs are responsible for the vast majority of value
created at their companies.
Average Median
6.0 6.0
Replacing CEO talent is risky. This is why succession planning Much tougher to find someone with cross-training, general
and predictive assessments are so critical. management experience. Often have to take CEOs from
smaller companies: like bringing baseball players from AA to
The talent pool is scarce, and the cost of a poor hire makes major leagues. It is much more difficult than ten years ago.
decision makers hesitate. Getting consensus on who and
what is needed is a growing roadblock. I remember a CEO recruitment situation where a potential
CEO was approached by a board to leave to become their
Scrutiny of companies and CEOs by general shareholders, CEO. His response was: Im flattered but the amount you
activists, pension funds, media, and proxy advisory firm ISS would have to pay to buy me out of my contract would
make this job even riskier. embarrass you and embarrass me. He didnt take the job.
The role of a public company CEO has changed so There are enough people who could be CEO. The real question
dramatically in the last 10 years that ambition for the role is who could be the best CEO for a given company. Even if
has shifted away from large cap public companies to large they are only a little better than the next best candidate, they
private and mid-cap public and others. The talent is less are worth a lot to the company. But it is extremely difficult
prepared because the role is so different from the experience to judge that in advance. You cant really know who has that
they have gathered to get to the CEO level. magic combination of strategic clarity and leadership until
they are plugged into the team.
Yes, it is very difficult to find a person with significant industry
experience, strong leader, visionary, earns confidence Traditional attributes like experience in a related industry
(hearts and minds) of the people, has strong financial and have to be done away with. Its more important to have
operational gifts, willing to work a significant amount of passion to win, conviction, being able to balance risk and
time (when they have no economic need to work), take on all reward balance in decision making, collaborative yet decisive,
the political mess, see talent in the right people, and much independent thinking, and surrounding yourself with great
more. It is one of the most extreme roles out there today and people.
becoming less desirable based on the political landscape. A
person taking the job for the money is going to fail as CEO. Expense reduction initiatives in most years have eliminated
many leadership development programs and mentors,
exacerbating the problem.
DAVID F. LARCKER
David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford
Graduate School of Business; director of the Corporate Governance Research
Initiative; and senior faculty of the Arthur and Toni Rembe Rock Center for
Corporate Governance. His research focuses on executive compensation
and corporate governance. Professor Larcker presently serves on the Board
of Trustees for Wells Fargo Advantage Funds. He is coauthor of the books
A Real Look at Real World Corporate Governance and Corporate Governance
Matters.
Email: dlarcker@stanford.edu
Twitter: @stanfordcorpgov
Full Bio: http://www.gsb.stanford.edu/faculty-research/faculty/david-f-larcker
NICHOLAS DONATIELLO
Nicholas Donatiello is a recognized expert in the areas of consumers, media,
and technology. He is president and CEO of Odyssey and a lecturer at Stanford
Graduate School of Business, where he lectures on the roles, responsibilities,
and performance of boards in public, early stage private and not-for-profit
companies. Donatiello is Chairman of the Board of several of the American
Funds from Capital Research and Management. He is also a member of the
Board of both public and early stage private companies including Dolby
Laboratories, where he chairs the Compensation Committee, and Big 5
Sporting Goods. Donatiello is a director of the Schwab Charitable Fund,
one of the nations largest grantmaking charities, distributing more than $1
billion in annual grants to charities. He chairs the Compensation Committee.
Email: donatiello@stanford.edu
Twitter: @nickdonatiello
Full Bio: http://www.gsb.stanford.edu/faculty-research/faculty/nicholas-donatiello
BRIAN TAYAN
Brian Tayan is a member of the Corporate Governance Research Initiative at
Stanford Graduate School of Business. He has written broadly on the subject
of corporate governance, including the boards of directors, succession
planning, compensation, financial accounting, and shareholder relations.
He is coauthor with David Larcker of the books A Real Look at Real World
Corporate Governance and Corporate Governance Matters.
Email: btayan@stanford.edu
Full Bio: http://www.gsb.stanford.edu/contact/brian-tayan
Acknowledgments
THE AUTHORS WOULD LIKE TO THANK MICHELLE E. GUTMAN OF
THE CORPORATE GOVERNANCE RESEARCH INITIATIVE AT STANFORD
GRADUATE SCHOOL OF BUSINESS FOR HER RESEARCH ASSISTANCE
ON THIS STUDY.
Copyright 2017 Stanford Graduate School of Business and the Rock Center for Corporate Governance