Forced CEO exits cost large companies 112 billion

23 April 2015 Consultancy.uk

By reducing the number of forced turnovers in CEOs in the world’s largest companies, $60 billion a year in additional value can be added, finds a new report from Strategy&. As it stands forced out CEOs cost companies an average of $1.8 billion in lost value, while further increasing the CEO turnover rate and the risk of further reductions in shareholder returns.

Over the past 15 years, Strategy& (formerly Booz & Company) has investigated the phenomenon of deposition and succession planning for CEOs at the world’s largest 2,500 companies. The research emphasis on identifying how the degree and nature of changes, forced or planned, as well as the economic impact on the company a year before and after the change.

Turning over poor returns
The most recent edition of the report continues to find that the events leading up to a depositions and its aftermath are bad news for company shareholders. With the change of leadership comes a handover, handovers take time to complete and can go poorly. In terms of how such a change affects a company, Strategy&’s research shows that on average, change at the top comes at a price: in the year preceding the change Total Shareholder Return (TSR) lies -2.3% relative to companies’ indices, and it falls again, to -3.5%, in the year after.

Median Total Shareholder Return in the Turnover Window

However, while the average shows a drop in TSR, there are stark difference between planned and unplanned handovers. If the CEO is forced out, then the year preceding the event TSR falls to -13%, while the year after sees a -0.6% drop. For planned succession the preceding years sees a TSR -0.5% drop, while the year following sees a median drop of -3.5%. In real dollar terms, depositions are expensive. Forcing out CEOs costs all of the surveyed businesses that undergo such a process $112 billion in a year – which is roughly $1.8 billion for each company more than if their turnovers had been planned.

Forced turnovers

Internal vs outsiders
Another finding from the study is that the turnover of CEOs is correlated to whether they are an internal promotion or an external acquisition. Higher performing companies over the past ten years have hired internally in 79% of successions, while low performers in 70% of events. The consultants further find that insider CEOs are forced out less often, with 25% for insiders versus 36% for outsiders, and, in ten out of the fifteen years of the study, insiders generated higher TSR.

The turnover rate between high and low performing companies also varies considerable, with high performing CEOs sticking around for a median tenure of 4.8 years compared with 6.3 years at average performers – but this is far less turnover than among the lowest performers, where the median tenure is only 3.4 years.

CEO Succession Reasons as a Percentage of Turnover Events

Decreasing force
While the effects on TSR are negative for companies that undergo forced CEO turnover, the number of such events has been decreasing in recent years. Of the turnover events in the past 15 years, 2014 saw the lowest number of people being forced out at 14% of total successions. 2002 for comparison saw 47% of successions involve force. However, closer inspection shows that there is variation in the numbers. For instance, over the past 15 years, companies in the highest quartile of performance have had planned turnovers 79% of the time, compared with 55% among companies in the lowest quartile. And while this has a negative TSR effect on already poorly performing companies, a forced turnovers bring with them further long term – and often negative – effects.

CEO Turnover Rate by Succession Reason

Vicious cycle
The research highlights that there is a danger of a vicious circle being generated for businesses that undergo forced transitions. With CEOs who come in after a forced succession have shorter median tenures than those coming in after a planned succession – only 4.2 years compared with 5.6 – a consequence of which is that companies with forced transitions are set up for more frequent turnovers. Moreover, with poorly performing companies more often involved in forced turnovers, and tending to hire from outside – the long term effects can be paralysing for the companies, with continued uncertainty and constant change. With already increased lower TSR more often as more turnover happen, these company can find themselves in a vicious cycle.

Company Distribution by Number of Turnovers and Quartile of Performance

The authors end on a positive not: “There is good news: if companies continue the trend toward more planned CEO changes, to the point that they reduce the share of forced turnovers to 10 percent, we estimate that they could collectively generate an additional $60 billion in value (all else staying the same).”

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Why leaders must balance technical expertise with soft skills

17 April 2019 Consultancy.uk

Soft skills matter in the workplace just as much as technical expertise, writes Samantha Caine, Managing Director of Business Linked Teams.

For too long technical expertise has been seen as the marker of a strong candidate for development into a sales or leadership position. Sales and leadership candidates are tasked with demonstrating a diverse and wide-ranging set of technical skills, yet their aptitude in these technical skills or ‘hard skills’ cannot signify great leadership potential. This is why a healthy balance of soft skills and technical ability is required. 

So what exactly is the difference between technical skills and soft skills? In engineering, it’s crucial to demonstrate knowledge of physics as well as a strong grasp on mathematical equations. Yet, in any industry, it’s important for leaders to be able to interact with other people effectively with soft skills like communication, empathy and adaptability. 

Business Linked Team’s 2018 study into internal leadership development revealed that 69% of large organisations are prioritising the identification and development of future leaders from within the workforce. As more and more organisations begin to invest in sales or leadership development within their existing workforces, more focus needs to be placed on ensuring the right soft skills are in place. 

With those soft skills in place throughout the workforce, the business will benefit from a wider pool of potential leaders developing under their noses, and it should be the same where sales candidates are concerned. 

It’s not just about easier access to ideal candidates for these positions without the rigmarole of recruiting from outside of the organisation. The leadership development study also found that 89% of HR decision makers say succession planning has become a top priority. Those currently serving in leadership positions can’t lead forever and the same goes for those generating sales for the business.

Why leaders must balance technical expertise with soft skills

From people leaving for new opportunities or retirement, to people simply stepping aside to focus on other areas of the business, successful leaders and salespeople require experienced and capable successors that will be ready and able to confidently step into their shoes and pick up the mantle without the business experiencing any lapse in performance.

Soft skills make stronger candidates

When it comes to the soft skills required, a strong leader must be able to manage through clear communication and effective time management, coaching and goal setting. They must be able to demonstrate empathy and empower their teams to be successful, productive and fully engaged. And beyond simply giving direction, they must also be able to take direction from those above them and cascade the business strategy down through their teams. 

A strong sales candidate must possess the ability to communicate value to the customer, negotiate well and protect margin or the ability to increase the scope of a particular sales opportunity. 

With the relevant soft skills in place, the business will benefit from increased productivity, greater agility against changing market conditions and greater transparency. In turn, this will provide visibility on issues and inefficiencies while removing opportunity for miscommunication. All of this can transform the culture of a department, improving employee satisfaction and reducing staff turnover. 

Ultimately, developing leadership or sales candidates will require the business to strike the right balance between technical skills and soft skills, and this requires an effective and sustained learning journey.

A balanced learning journey

Facilitating and supporting the development of leadership and sales is best achieved by establishing training groups. By cultivating training groups, businesses are creating talent pools that will inspire and support each other on the learning journey. However, personal goals and learning objectives must be defined for each individual based on their own existing skillsets and the skills that each individual needs to develop. 

With the emergence of e-learning, businesses recognise the value of online-based learning activities, yet many make the mistake of opting for one-size-fits-all solutions which are solely focused on self-study. A development solution will only deliver true return on investment if it combines e-learning activities with group learning activities that provide opportunity for shared experiences and support.

A blended learning solution that combines self-study and face-to-face group learning activities will aid strong development of the talent pool through shared experiences. Through these shared experiences, those undergoing the training will organically develop a support network that supports the development of the group as much as it supports the development of each individual. 

The blended learning approach is supported by one of the seven principles of human learning that socially supported interactions aid the individual development of expertise, metacognitive skills, and formation of the learner’s sense of self. The strongest opportunities for development can be unlocked by blending workshops with online activities such as virtual sessions, peer coaching, self-study, online games and business simulations. But it’s crucial to provide a blend of one-to-one and group sessions too.

Beyond delivering a better learning outcome for the employee, the blended learning approach allows organisations to adapt their training quickly and easily to shifting business demands in an ever-changing landscape.