Retaining departing CEOs on Board may impact firm performance

Thursday, 28 October 2010 05:40 -     - {{hitsCtrl.values.hits}}

The decision to offer board membership to a departing CEO can negatively impact corporate performance, according to a report released recently by The Conference Board.

“The decision to retain the former CEO as a board member could have benign consequences,” says Jason Schloetzer of Georgetown University’s McDonough School of Business and author of The Conference Board report.

“The retained CEO may be satisfied to continue interacting with long-time colleagues a few times each year during board meetings and executive retreats. But our analysis indicates this is not necessarily the case. News coverage surrounding instances of board retention suggests that these CEOs frequently maintain a high profile and continue to have significant — sometimes damaging — involvement within the firm.”

The report, Retaining Former CEOs on the Board, is the most recent instalment of The Conference Board Director Notes series. It features an analysis of 358 CEO turnovers (for reasons other than mergers, reorganisations, spin-offs, or death) in S&P 1500 firms during 1998-2001.

A more extensive analysis of this data will be published in the Journal of Accounting later this year. Information collected included length of the departing CEO’s board service, personal and professional attributes of the incoming CEO, and the firm’s subsequent stock price performance.

The report finds that companies which retained former CEOs on boards have  relatively lower stock returns compared with the 2,733 companies in which CEOs continued as chief executives (-1.2 per cent return compared with a 3.4 per cent return, respectively).

Retention as a board member has important consequences for subsequent board decisions and post-turnover firm financial performance, since delayed departures often appear to restrain the maximisation of shareholder value.

Moreover, effects of a former CEO’s retention on the board also seem to differ according to his or her individual attributes, the report finds. For example, there is a negative correlation between post-turnover stock returns and board retention of a CEO who was not a founder of the firm. Board retention frequently involves powerful, aging CEOs who have achieved a less-distinguished record of firm financial performance in the years leading up to their departure.

“Directors need to carefully consider the role of the departing CEO as part of their fiduciary duties regarding leadership transition oversight,” says Matteo Tonello, Director of Corporate Governance Research at The Conference Board.

“The Conference Board does not recommend a one-size-fits-all solution. In light of the potential negative consequences, the board that opts for this form of succession should discuss the appropriate safeguards.”

Factors affecting the decision to retain a departing CEO on the board include the level of insider ownership of the company, the stock performance in the two years preceding the succession, and the existence of interlocking relationships among current directors.

Other findings include:

Former CEOs were retained on their companies’ boards for at least two years in 130 of 358, or 36 percent, of the turnovers reviewed.

Attributes relating to CEO power that appear to impact a company’s retention decision include: CEO owning a larger fraction of the firm’s stock; CEO jointly holding the board chairman position; relatively fewer independent directors on the board.

Departing CEOs are often retained if the succession choice enables the former CEO to retain a relatively powerful bargaining position within the firm.

This report integrates research on CEO succession by The Conference Board in the last two years – including The Role of the Board in Turbulent Times: CEO Succession Planning (2009) and Examining the Impact of SEC Guidance Changes on CEO Succession Planning (April 2010) – to document developing best practices and analyse the effects of the October 2009 SEC Staff Bulletin on the non-excludability of shareholder resolutions on this topic.