$8bn cost of CEO churn

The exodus of CEOs is costing shareholders more than $8 billion a year, suggesting a pressing need for Australian boards to institutionalise the CEO succession planning process, as well as take active steps to increase CEO tenure.

The exodus of CEOs is costing shareholders more than $8 billion a year according to the PwC's Strategy & Annual CEO Succession Study. What this suggests is a pressing need for Australian boards to institutionalise the CEO succession planning process and take active steps to increase CEO tenure.

The 15th annual study, found leading Australian companies had 42 CEO turnovers in 2014 – almost 35 per cent, or one in five more CEO turnover events relative to leading global enterprises.

According to Varya Davidson, partner at PwC’s Strategy& and co-author of the study, there are a couple of key reasons as to why Australia is churning through CEOs faster than global peers.

“The first [reason] is a reflection of short-termism in the corporate community where boards are looking for ‘fix-it kind of people’ to come in and basically turn the company around in the short term. The view is that they will be there for a short time, make an impact and move on. The second [reason] is that CEOs in Australia face more personal media pressure than the rest of world.”

Davidson said the survey identified the three main types of succession events as either driven by mergers and acquisitions, forced and unplanned, or a planned succession.

“There are multiple reasons behind a planned turnover,” she says. “It can often be driven by an encumbered CEO, where, the CEO wants to retire, so the board and CEO have to manage this transition process together. Alternatively, if a succession is planned, it can be because of a mutually agreed ‘time is right’ decision or because the company is taking a new direction and therefore it will be valuable to have a new set of capabilities at the CEO level. When it is unplanned, however, mostly, it’s because boards lose confidence. For example, poor company performance or a major drop in share price.

To help with smoother transitioning of CEOs, Australian boards must institutionalise the process, factoring the advantages of diversity and take formal steps to increase the CEO tenure, said Davidson.

“Boards themselves must proactively and visibly take ownership for succession and planning. For example, companies need an active pipeline of candidates, both internal and external. They need to be able to articulate clearly the capabilities and behaviours they are looking for in a new CEO. Then, through managing the process, articulate clear actions, owners and timelines.”

The biggest take away from this year’s annual study was the price tag of doing CEO succession badly. “This really was the key message. CEO succession has to be proactive and institutional not re-active and event-driven, because it is costing billions of dollars .”