Communicating CEO succession plans to institutional investors does not have to be complicated. Generally speaking, transparency around your CEO succession process is a good thing. This should not be confused with providing investors with a play-by-play update (I would not recommend the latter). Here’s a high-level outline that may be useful for CEOs and Board members:
Define the Succession Process Timeline (share publicly): For example:
“John Doe, CEO of Company XYZ will become Executive Chairman on January 1st 2019. XYZ will name a new CEO during Q4 2018.”
We chose the word “during” as opposed to “by” because the latter is too open-ended and invites investors to repeatedly ask “when”. “During” provides a bit of air cover around the timing question. You can always move the date forward and name a CEO early. Don’t push the date back. Make sure to allow adequate time to run a thorough process.
In terms of public disclosure – an earnings call is best. Address the topic in the prepared remarks. Anticipate investor questions and proactively address in the prepared remarks. Repeat your selection process in the prepared remarks each EPS call until a new CEO is named.
Define CEO Selection Criteria (share publicly): For example:
“As CEO I will work with the Board to define the criteria by which XYZ will select its next CEO…”
“Myself and the Board have defined the CEO selection criteria…”
“We will consider both internal and external candidates…”
“We have a deep bench of qualified executives and therefore will limit the selection process to internal candidates…”
“We will select the best candidate that embodies our culture and core principles…”
“Our next CEO will have a core competency around new product development…”
“Our next CEO will have had a rich global operating experience including significant time operating across Asia…”
It Helps to Have A Strong Corporate Culture and Well-Defined Principles
Whatever the selection criteria and core CEO attributes may be, lay them out. Companies with strong corporate cultures and well-defined principles will have an easier time with CEO Succession and its external communication to investors. CEO Succession should not be an event-driven process but rather an operations-driven process where internal executives qualify themselves and audition for the next job every day.
We covered this topic in a recent CEORaterPodcast:
Bezos is Top Tech CEO with a Total Stock Return of 83,639%
We recently queried our CEORater database to identify the Top Technology CEOs as measured by stock price performance during each CEO’s tenure. Amazon’s Jeff Bezos topped our list by a wide margin. For purposes of this exercise it helped to have been a CEO for an extended period of time. It is also interesting to note that 8 of the Top 10 and 14 of the Top 20 CEOs on our list are Founder CEOs. We define “Founder” CEOs as those CEOs who were present for the first dollar of revenue earned. Additional detail may be found at CEORater.com. Contact email@example.com for Excel spreadsheet detail.
Our Hypothesis: Founder CEOs Will Outperform Over the Long-Term
We believe that founder CEOs will generally outperform non-founder peer group CEOs as well as broader benchmarks over the long-term. We believe this to be true both in terms of stock market returns as well as operating performance as measured by traditional financial measures such as Cash ROIC, ROE, ROA and Economic Value Added.
We recently created the CEORater Technology Founder CEO Index in part to help test our hypothesis. Over time we plan to operationalize the index to where investors may use it as an investment vehicle (stay tuned).
Founder CEOs tend to take a long-term view of the companies they created (their children). Where hired CEOs focus on the current quarter and year, many founder CEOs want their respective companies to thrive in perpetuity.
Legacy Matters to Founder CEOs
It’s about legacy for founder CEOs:
It’s why Jeff Bezos (AMZN) thinks about 50 year increments as opposed to quarterly increments;
It’s why Reed Hastings (NFLX) pushed OTT, original content and international investment when many investors wanted a U.S.-focused DVD distribution company;
It’s why Bill Stone (SSNC) has built one of largest FinTech companies during a period when much of the Capital Markets industry has become commoditized.
We reviewed Total Stock Returns over the January 3rd 2017 – February 8th 2018 period:
We wanted to see how the CEORater Technology Founder CEO Index would fare if we were to market cap weight the components (review component details here). Therefore we compared our CEORater Index to the S&P 500 Information Technology Index (Ticker: S5INFT). We compared total stock returns for each for the period January 3rd 2017 – January 22nd 2018:
The market cap weighted total stock return for the CEORater Technology Founder CEO Index over the measured period was 63.72%.
These two most recent TEK2day posts are just the beginning of our analysis in an effort to test our hypothesis that Technology companies led by founder CEOs will in the aggregate outperform peer group companies led by non-founders.
We examined the stock performance of Technology companies led by founder CEOs vs. a broader Technology index where the CEOs of the component companies are not necessarily company founders. The CEORater Technology Founder CEO Index is an extract from our CEORater database. You may view the component companies here.
We reviewed the period from January 3rd 2017 through January 22nd 2018:
The unweighted total stock return for the CEORater Technology Founder CEO Index over the measured period was 46.71%.