The Impact of Unplanned CEO Succession on Organizational Performance
When a CEO unexpectedly departs or is terminated, it can send shockwaves throughout an organization. There is often uncertainty regarding the future of the organization and its leadership, which can lead to decreased morale, decreased investor confidence, and a decline in organizational performance. But what does the research say about the impact of unplanned CEO departures on organizational performance? Let’s take a closer look.
The Research: A Moderate to Significant Impact on Organizational Performance
Studies examining the impact of CEO departures on organizational performance have yielded mixed results. Some studies suggest that there is a moderate impact on performance following an unplanned CEO departure, while others suggest that there can be a significant impact.
The University of Pennsylvania conducted a study that revealed organizations with an unexpected CEO departure suffered a 3.3% decrease in return on assets and a 7.4% decrease in return on equity.[i] A study by the University of Notre Dame found that organizations with unplanned CEO departures experienced a 6.8% decline in market value.[ii]
Other studies have found a more significant negative correlation between unplanned succession and organizational performance. A recent study analyzed the link between total shareholder returns and succession characteristics of more than 2500 companies between 2000 and 2014. According to the study, organizations that dismissed their CEO ceded an average of $1.8 billion in shareholder value in comparison to those that had a prearranged succession plan, irrespective of whether the successor was an insider or outsider.[iii] Additionally, large organizations that underwent forced successions would have generated, on average, an estimated US$112 billion more in market value in the year before and the year after the departure of their CEO had the departure been the result of succession planning.[iv] That’s a significant amount of value forfeited by shareholders.
Factors That Contribute to the Impact of Unplanned CEO Succession
What explains these varied results? The impact of an unplanned CEO departure depends on several factors, including the circumstances surrounding the departure, the industry in which the organization operates, and the strength of the organization’s leadership team.
Loss of Business Continuity
When the leader of an organization suddenly departs, it can cause significant disruptions in business operations. This disruption can lead to a loss of revenue, damaged customer relationships, and decreased employee morale. Additionally, without a succession plan in place, organizations may struggle to find the right candidate to fill the open position, leading to a prolonged period of uncertainty.
Leadership Void
A CEO departure can create a leadership void, which can be particularly concerning if the departing CEO was well-regarded by investors or had a long tenure with the organization. Investors may worry about whether the organization will be able to find a suitable replacement quickly and whether the new CEO will be able to provide the same level of leadership as the departing CEO.
Reputational Damage
In some cases, the circumstances surrounding a CEO’s departure can damage the company’s reputation. For example, if the CEO is forced to resign due to allegations of misconduct or poor performance, investors may worry about the organization’s culture and governance practices. This can further erode investor confidence in the organization.
Negative Impact on Organizational Culture
The sudden departure of a key leader can create uncertainty and anxiety among employees, leading to a negative impact on organizational culture. Employees may feel that the organization doesn’t value their contributions or that their future with the organization is uncertain. This can lead to decreased morale, lower productivity, and an overall decline in organizational performance.
Given the high costs of not having a succession plan in place, it’s not surprising that many organizations choose to announce C-Suite leadership succession plans far in advance of an executive’s departure.
The Importance of Strong Succession Planning
One factor that can mitigate the negative impact of an unplanned CEO departure is strong CEO succession planning. Organizations that have a clear succession plan in place are better equipped to handle a sudden leadership change and can minimize the disruption to business operations.
A study by the National Bureau of Economic Research found that companies with strong succession planning in place experienced a reduced negative impact on performance following an unplanned CEO departure.[v] These organizations were better equipped to maintain business continuity and were able to quickly appoint a new leader to guide the organization forward.
Additionally, strong succession planning can help mitigate the negative impact on employee morale and investor confidence that often follows an unplanned CEO departure. Employees are more likely to feel secure in their positions when they know that there is a clear plan for leadership continuity. Announcing a succession plan demonstrates that the organization has a plan for leadership continuity, which can help alleviate any concerns or uncertainty about future leadership changes. As a result, investors are more likely to have confidence in the organization’s future prospects.
The impact of unplanned CEO departures on organizational performance is a complex issue that depends on several factors. While some studies suggest that the impact may not be significant, others suggest that it can be quite significant. One thing is clear, however: organizations that have strong succession plans in place are better equipped to handle a sudden leadership change and are more likely to maintain business continuity and protect organizational performance.
Looking for More?
If you’re ready to start your succession planning process, explore SIGMA’s Succession Planning Launch. We offer flexible in-person and online services that will bring your leadership team together to create a plan that works for you. Our consultants can help you get six months of work done in only six hours. By the end of the session, you will know how to launch a robust succession planning process and have a customized 12-month succession plan for each member of your leadership team. Contact Glen Harrison for more information. We’re always happy to chat.
Talk to an Expert
Glen Harrison is an organizational transformation consultant and succession planning expert. Over the course of his career, Glen has worked with one-third of the Fortune 500 list and with every level of government in Canada and the United States. Having worked with numerous clients to build robust succession plans from the ground up, Glen has extensive experience in the application of SIGMA’s products and services to help organizations realize their people potential. If you are interested in learning more about SIGMA’s succession planning services, send Glen an email or give him a call. He’d love to chat with you.
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[i] University of Pennsylvania (2008). Departing CEOs Leave Their Firms Worse Off. Retrieved from https://knowledge.wharton.upenn.edu/article/departing-ceos-leave-their-firms-worse-off/
[ii] University of Notre Dame (2015). Study examines costs of unplanned CEO departures. Retrieved from https://news.nd.edu/news/study-examines-costs-of-unplanned-ceo-departures/
[iii] Challenger, Gray & Christmas. (2019, January 15). 2018 Year-End CEO Turnover Report. Retrieved from https://www.challengergray.com/press/press-releases/2018-year-end-ceo-turnover-report-ceo-exits-hit-record-1-480-24th-consecutive-month
[iv] Challenger, Gray & Christmas. (2019, January 15). 2018 Year-End CEO Turnover Report. Retrieved from https://www.challengergray.com/press/press-releases/2018-year-end-ceo-turnover-report-ceo-exits-hit-record-1-480-24th-consecutive-month
[v] National Bureau of Economic Research (2014). CEO succession planning and stockholder reactions. Retrieved from https://www.nber.org/digest/nov14/w20430.shtml