CEO Succession: How to minimize the impact when your CEO retires
CEO retirement is the most common form of succession among U.S. public firms. However, researchers know relatively little about the CEO retirement process and its implications. CEO retirement has traditionally been treated as a non-event, partly because of the belief that its timing can be predicted (e.g., age 65). Researchers have assumed that if the time of CEO retirement is known in advance, capital markets would show much less concern for this type of succession in comparison to unexpected CEO exits such as resignation or firing.
In a recent study published in the Journal of Management Studies, Kansas State Assistant Professor of Management Hansin Bilgili, and his colleagues (Joanna T. Campbell, Alan E. Ellstrand, and Jonathan L. Johnson), challenged this assumption and further examined the question of what happens when CEOs decide to retire.
They focused on how abnormal stock returns can indicate how shareholders reacted to news of a CEO's retirement. The research team argued that when the flow of managerial resources, such as the human and social capital of the CEO, is disrupted with retirement, shareholders would be concerned about the future performance of the firm. This is due to the uncertainty surrounding how the CEO acts and how a new CEO will act in his or her place.
The study examined CEO retirement events at large, publicly-traded firms over a 10-year period. While the study showed that shareholders often react negatively to CEO retirement disclosures, their response is less negative when the announcements are carefully crafted. The language and underlying tone of the announcement can help reduce shareholder uncertainty and create a positive impression of the firm.
The research findings show a 41 basis-point or 0.41 percentage points decrease in stock price over a two-day window after a CEO's retirement announcement, signifying a major change period for the firm. Remaining members of the executive team and members of the board bear the key responsibility of addressing shareholders’ concerns and increasing their confidence about the future performance of the firm during CEO retirement.
So what can firms do to better manage CEO retirement?
- It would be helpful for top managers of the firm to carefully communicate a succession plan to firms’ shareholders to reduce the information gap between the firm and its shareholders. It would be productive for leaders to release statements that can reassure shareholders that the firm already has or will attract new managers going forward to effectively bridge the human and social capital gap left by the incumbent’s exit.
- Managers are also likely to benefit from avoiding the use of overly optimistic language that is not reflective of reality and could potentially damage shareholder relationships, especially if these statements are perceived by shareholders as manipulative or misleading in their underlying intentions.
- Finally, CEO retirement is a time of both sense-making and sense-giving of organizational change, and as such, managing shareholders’ subjective interpretations of organizational change should become a routine part of executive succession planning.
Read More: Bilgili H, Campbell JT, Ellstrand AE, Johnson JL. 2017. Riding off into the Sunset: Organizational Sensegiving, Shareholder Sensemaking, and Reactions to CEO Retirement. Journal of Management Studies, 54(7): 1019–1049.