Feb 21 2012
AESC: Why did FTI conduct the Global CEO Transitions Study?
Bryan Armstrong: FTI Consulting is a global business advisory firm that provides solutions for clients to address complex business opportunities and challenges including CEO transitions. Based on our experience working with executive teams across a range of industries and sizes, we spotted two important trends that lead us to conduct the study: 1.) The tenure of a CEO has rapidly declined over the past decade, and 2.) Leadership transitions represent a critical moment of change where, anecdotally, we observed significant variations in stock performance following the transitions. The Global CEO Transition Study was designed to explore the extent to which enterprise value is at risk during leadership transitions and the factors that contribute most to amplifying or mitigating that risk.
AESC: In looking at the data, one is struck by the amount of CEO turnover and the profile of where the new CEOs are coming from and their backgrounds. Any comments?
Bryan Armstrong: Our study confirmed our initial hypothesis that CEO tenure is on the declined; however, we were surprised by the level of turnover observed in our sample set. Perhaps even more interesting, we noted a significant gap between the characteristics and traits investors deem most important to a new CEO and the actual data that comprised the average profile of new CEOs in our sample set. This gap has important implications for how the reputation of a newly appointed CEO is shaped.
AESC: So, how are new CEOs assessed by investors?
Bryan Armstrong: Contrary to conventional Wall Street wisdom, new CEOs are NOT assessed based on revenue and earnings per share growth per se. In fact, leadership change provides a window of opportunity for those that seek reprieve from Wall Street’s quarterly earnings hamster wheel.
AESC: The study discussed the risks inherent in CEO transitions. Can you tell us about some of the most critical risks?
Bryan Armstrong: Our study found that leadership change presents more downside risk than upside potential. In particular, the greater the degree of surprise and the higher potential for significant corporate change, the more enterprise value is at risk. But, the value at risk also increases over time, irrespective of the circumstances related to the transition. This held true for even the most benign transitions such as a succession or retirement.
AESC: What can the new CEO do to address the concerns of investors?
Bryan Armstrong: Certainly each leadership transition will have unique opportunities and challenges and therefore will need a plan of action tailored to these circumstances. However, there are five core precepts for successful leadership transitions: 1.) listen to your stakeholders, 2.) be honest and critical about the current state of the business, 3.) set the agenda for success and provide the means to measure your progress, 4.) engage with your stakeholders in unique and meaningful ways, and 5.) be prepared for the unexpected.
AESC: How can risk be mitigated either in the search process or after placement? Is there a role for the Search Committee here?
Bryan Armstrong: Risk can be mitigated not just during the search process or after a placement, but also well before the search process is commenced. Further, a Search Committee can play a meaningful role in mitigating risk by ensuring the right information is on hand to make informed decisions about potential candidates and that a well-vetted plan for positioning the new CEO is at the very least contemplated prior to placement.
AESC: How can this study be applied for the benefit of the Retained Executive Search community?
Bryan Armstrong: For publicly traded companies, success or failure of a leadership transition is ultimately interpreted, and in some cases determined, by stock performance. It is the big scoreboard that reflects the culmination of current performance and expectations for the future where the CEO is held uniquely accountable. Considering that the success of a Retained Executive Search firm is closely tied to that of the placed CEO, the implications of our study have a direct and indirect impact on your industry.
In particular, this study illuminates the expectations, beliefs and impressions of investors regarding leadership change which gives the necessary context for understanding the behaviors of the stock (or in scoreboard analogy what score it reflects) and should serve as a blueprint for identifying and successfully managing through the risks inherent in CEO transitions.
AESC Americas Conference “Navigating through Uncertainty:
The Changing World for Executive Search” March 7 – 8, 2012, New York City
To learn more about the AESC Americas Conference, visit:
This interview was conducted by Brian J. Glade of the Association of Executive Search Consultants (AESC).
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