Business costs to changing CEOs

Unexpectedly setting the current CEO free to pursue other career interests costs companies $142 billion in lost market value annually. According to the authors of PwC's 2014 study CEOs, Governance and Success: The value of getting CEO succession right: "We estimate that at the world's largest public companies, just one problem - being forced into [CEO] turnovers instead of planning them - has recently cost each company in that situation an average of $2.3 billion in foregone shareholder value. [In fact] having a turnover at the top, for any reason, depresses companies' performance: the median shareholder return at companies that have changed CEOs falls to minus 3.5 per cent in the year after the change." In 1964, companies would last 33 years on the S&P 500.

In 2016 it was 24 years and in 10 years' time it will be 12 years, according to US growth strategy firm Innosight. "At the current churn rate, about half of S&P 500 companies will be replaced over the next 10 years. Retailers were especially hit by disruptive forces." No surprises there for Australian boards.

Our own research on Australian companies shows that few companies cope well with change. Of the top 50 companies in 1980, only 10 survive. Thirty-four were taken over and seven underperformed. And CEO tenure is getting shorter: the average lifespan of a CEO in an ASX Top 50 company is 3.3 years but in top performing companies it is 6.6 years.

If you are investor or a director, what does the research tell you about who to appoint? The researchers behind the CEO Genome project say there is "a fundamental disconnect between what boards think makes for an ideal CEO and what actually leads to high performance. That starts with an unrealistic yet pervasive stereotype, shaped in large part by the official bios of Fortune 500 leaders. It holds that a successful CEO is a charismatic, six-foottall white man with a degree from a top university who is a strategic visionary with a seemingly direct-to-the-top career path and the ability to make perfect decisions under pressure." Put together, the published research from the CEO Genome project, others and our own, reveals that there are eight steps to choosing the right CEO:

1. Appoint an insider. Outsider appointments are more likely to end badly. Outsider CEOs have been forced out of office 44 per cent more often than insiders. Some companies, such as Woodside, are serial appointers of outsiders.

2. Keep them a long time. That means at least six years, but if they are very good, like Macquarie Bank's Nick Moore and CSL's Brian McNamee, don't let them go. McNamee was CSL CEO for 20 years. After five years away, he rejoined the company as a director in February and takes over as chair in October.

3. Appoint an introvert. They don't do charisma well and are not good at the interview, but they are more likely to be exceptional performers. If they have made at least one major mistake, that's even better.

4. Appoint a CEO with a track record of being more decisive, and making decisions earlier, faster and with greater conviction.

5. CEOs who engage staff and other stakeholders with a business direction are 75 per cent more successful in the role.

6. Appoint a CEO who has a reputation for putting the right team in place quickly.

7. CEOs who are adaptable and think long term are more successful.8. And, as the CEO Genome people say: "CEO candidates who scored high on reliability were twice as likely to be picked ... and 15 times more likely to succeed ... Boards and investors love a steady hand, and employees trust predictable leaders."

Julie Connolly