Retaining Departing Ceos On Board May Hurt Performance

The decision to offer board membership to a departing CEO can negatively impact corporate performance, according to a report released by The Conference Board

The decision to offer board membership to a departing CEO can negatively impact corporate performance, according to a report released by The Conference Board.

ìThe decision to retain the former CEO as a board member could have benign consequences,î says Jason Schloetzer of Georgetown University's McDonough School of Business and author of The Conference Board report. ìThe retained CEO may be satisfied to continue interacting with long-time colleagues a few times each year during board meetings and executive retreats. But our analysis indicates this is not necessarily the case. News coverage surrounding instances of board retention suggests that these CEOs frequently maintain a high profile and continue to have significant--sometimes damaging--involvement within the firm.î

The report is the most recent installment of The Conference Board Director Notes series. It features an analysis of 358 CEO turnovers (for reasons other than mergers, reorganizations, spin-offs, or death) in S&P 1500 firms during 1998-2001. Information collected included length of the departing CEOís board service, personal and professional attributes of the incoming CEO, and the firmís subsequent stock price performance.

The report finds that companies that retained former CEOs on boards have relatively lower stock returns compared with the 2,733 companies in which CEOs continued as chief executives (-1.2% return compared with a 3.4% return, respectively). Retention as a board member has important consequences for subsequent board decisions and post-turnover firm financial performance, since delayed departures often appear to restrain the maximization of shareholder value.

Moreover, effects of a former CEOís retention on the board also seem to differ according to his or her individual attributes, the report finds. For example, there is a negative correlation between post-turnover stock returns and board retention of a CEO who was not a founder of the firm. Board retention frequently involves powerful, aging CEOs who have achieved a less-distinguished record of firm financial performance in the years leading up to their departure.

ìDirectors need to carefully consider the role of the departing CEO as part of their fiduciary duties regarding leadership transition oversight,î says Matteo Tonello, director of corporate governance research at The Conference Board. ìThe Conference Board does not recommend a one-size-fits-all solution. In light of the potential negative consequences, the board that opts for this form of succession should discuss the appropriate safeguards.î

Factors affecting the decision to retain a departing CEO on the board include the level of insider ownership of the company, the stock performance in the two years preceding the succession, and the existence of interlocking relationships among current directors.
Other findings include:

  • Former CEOs were retained on their companiesí boards for at least two years in 130 of 358, or 36%, of the turnovers reviewed.
  • Attributes relating to CEO power that appear to impact a companyís retention decision include: CEO owning a larger fraction of the firmís stock; CEO jointly holding the board chairman position; and relatively fewer independent directors on the board.
  • Departing CEOs are often retained if the succession choice enables the former CEO to retain a relatively powerful bargaining position within the firm.