Today, there are many and diverse topics that boards must oversee, with very little time available to address them. Additionally, changes to law 20.393 have multiplied by 10 the catalog of crimes for which directors can be accused. This is why the critical questions are which topics to prioritize and how much effort to dedicate to them, in order to fulfill the main mandate of directors: preserving the company’s value.
Among the topics that are often deprioritized in boards, despite the growing relevance in academia and consulting, is the succession planning for key positions. Only a small portion of companies maintain an updated succession plan. In a survey conducted by ESE Business School of 191 large companies in Chile, only 32% report having a plan for the succession of the CEO; in the United States, the proportion is similar for medium and large companies (1).
Is it really true that the succession plan is not as relevant as they say, or is it that prioritizing and executing it in the face of the growing needs of an organization becomes impractical?
Let’s look at the famous case of the forced succession of McDonald’s CEO.
At the end of 2002, the continued worsening of McDonald’s financial results and stock price forced the board to ask the CEO to resign and convince James Cantalupo to come out of retirement and return to the company as the new CEO with the challenge of turning around the company’s results.
Within a few months, Cantalupo, along with his team of executives, designed and began executing their turnaround plan, known as the “Plan to Win.” On April 19, 2004, Cantalupo would open the annual convention of franchisees and suppliers in Orlando with a speech. His speech would address the progress of the plan and future ambitions. However, that same day, at 5 a.m., the company’s directors, many of whom were present at the convention, received an unexpected call informing them of Cantalupo’s death. In response to the emergency, the directors convened an extraordinary session to define the company’s future. Hours later, they announced that the current COO, Charles Bell, would take over as the new CEO, and that same day, Bell delivered the opening speech at the convention, leaving the world astonished by the board’s agility in naming the CEO succession and preparing his successor.
Only 6 months later, Bell announced that he would resign due to advanced colorectal cancer. That same day, the board appointed James Skinner as the new CEO. Skillfully, the board had already identified Skinner as one of the candidates for Cantalupo’s succession six months earlier and was now ready to take on the challenge.
Despite all expectations, the company’s value remained intact, and most of the credit went to the board, which six years before Cantalupo’s death had demanded the identification and preparation of at least two candidates for each key position.
A more recent local case is that of Cencosud. In October 2023, the board had to face the departure of Matías Videla, the company’s CEO, after being fined for insider trading. After weeks of controversy, Videla decided to resign on October 17, and the board announced that Heike Paulmann, the chairperson of the board, would temporarily take on the role of CEO. However, the following day, the regulator warned that Article 49 of the Corporations Law prohibits the CEO from also being a director of the company. Therefore, two days after Videla’s resignation, the board appointed Renato Gutierrez, the Director of Management Control, as interim CEO while a Talent Committee was created to search for a new CEO. After three months of searching, three different CEOs, and increasing expenses on communication and executive search consulting, on January 26, 2024, the board announced that Rodrigo Larraín would take over as the new CEO of Cencosud.
Despite the fact that Cencosud had more than seven CEOs over the past 15 years, it appears that the company did not develop a robust succession plan to handle situations like that of October 2023. Even more so, seemingly in compliance with CMF NCG 461, Cencosud mentions its succession plan six times in its 2022 annual report as part of its talent management.
The apparent lack of a succession plan for the CEO and the improvisation by the board in appointing the chairperson as CEO after Videla’s resignation coincided with a USD 570 million reduction in the company’s value (around 10%). However, after the appointment of the first interim CEO and until the final appointment of Larraín, the company’s value recovered.
Maintaining and applying a succession plan seems to impact the value of a company in unexpected situations that force a change in the general management of publicly traded companies.
Since 2010, it is estimated that unplanned successions occur in 3 to 4% of large companies in an emerging country (2). This means that a Chilean publicly traded company has a 3 to 4% probability of facing a forced succession, and if it happens and there is no succession plan, it could lose 10% of its market value. Therefore, the board could conclude that the expected value of a forced succession without a succession plan could cost the company a loss of between 0.3% and 0.4% of its market capitalization.
From this perspective, planning for the CEO’s succession is relevant and impacts the preservation of the company’s value. In a context of increasing regulation, more and more issues are trying to take up the board’s agenda, and compliance ends up consuming a large part of the agenda, neglecting other important issues. This brings us closer to the German corporate governance model, where there is a Supervisory Board that focuses on compliance issues and an Executive Board that oversees management and strategy.
In any case, it seems better that, in the short term, boards define and respect an annual agenda, dedicating the necessary time and adjusting it according to the expected impact of the topics to be addressed.
References:
(1) CEO Succession in Chile: Changes Between 2019 and 2023; A. Enrione, F. Aldunate, F. Pavlic; 2023. Link: https://www.ese.cl/ese/site/artic/20240403/asocfile/20240403160837/sucesi__n_gerencia_general_2019_2023.pdf
(2) 2015 CEO Success Study: Global Findings; Strategy& and PWC; 2016. Link: https://www.pwc.com/gr/en/publications/assets/2015-ceo-success-study.pdf