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Dr Tom Gosling interviews Prof. Antonio Mello, Frank Graner Distinguished Chair in Finance at the University of Wisconsin-Madison and ECGI, to discuss his paper: 

Why Do Firms Often Not Have a CEO Succession Plan?” co-authored with Francesco Celentano, Assistant Professor of Finance at University of Lausanne. 

The key discussion points are:

  • CEO succession plans are crucial due to the significant impact a CEO's departure can have on a company. Annually, 10% of CEOs leave, and the costs associated with turnover are substantial. However, despite regulatory requirements, 40% of publicly listed companies do not have a succession plan.

  • Companies with a CEO succession plan tend to experience lower pecuniary losses when a CEO leaves, especially if the successor is appointed internally. They also recover faster from forced CEO turnovers and see less decline in profitability. While the financial costs of adopting a succession plan are minimal, the long-term benefits include reduced losses and quicker recovery.

  • Boards often hesitate to approve succession plans due to potential tensions with the CEO and personal costs for board members. Identifying a potential successor can create complications, and a lack of a succession plan can signal deeper governance issues. Not adopting a plan can indicate poor execution of fiduciary duties within the board.

  • The adoption of a succession plan is more likely when a CEO’s departure is imminent or when the CEO has been in place for a longer period. Companies with more independent directors may face fewer conflicts of interest but struggle with execution. A model suggests that boards are more inclined to adopt a plan when profitability declines or when a CEO’s departure seems certain.

  • A well-established succession plan helps boards avoid ineffective CEOs and retain good ones. The SEC could play a role by enforcing proper processes for succession planning, while institutional shareholders could ensure the adoption of these plans through stricter voting policies. Proper succession planning ultimately supports better decision-making and company stability.

     

We hope you enjoy the conversation. For more interviews in this series, visit this page.

ECGI Conversations is an interview series aimed at uncovering valuable insights, ideas, and perspectives from cutting-edge academic research. 

Hosted by ECGI Executive Fellow, Dr. Tom Gosling, this series delivers engaging discussions with leading experts in the field.

The ECGI Conversation Series is part of the Responsible Capitalism initiative. 

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