By Svea Herbst-Bayliss
NEW YORK (Reuters) – U.S. companies with lagging stock prices are now quicker to blame management and fire their top executive, but the process of finding a replacement has remained largely unchanged for the last decade, according to a report released on Monday.
Over the last seven years, financial performance and most notably a company’s stock price have become a stronger predictor of a chief executive’s ability to hold onto the job, research group The Conference Board found in its “CEO Succession Practices in the Russell 3000 and S&P 500: 2024 Edition” report.
The latest figures show 42% of S&P 500 companies that replaced their top executive this year had stock returns in the bottom quartile of their industry. The number is even higher among Russell 3000 companies, the index that tracks the largest 3,000 U.S. companies, with 45% of companies that replaced CEOs this year posting shareholder returns within the 25th percentile.
In 2017, only 30% of S&P 500 companies that replaced CEOs had a shareholder return in the bottom quartile, while it was 29% at Russell 3000 companies, the Conference Board data show.
“Corporate boards are clearly becoming less patient with underperformers,” said Blair Jones, managing director at executive compensation consulting firm Semler Brossy, who co-authored the report.
A board’s sense of urgency for making sure the right person is leading a company has increased dramatically since the pandemic as external factors like supply chain disruptions and geopolitical drama are no longer seen as excuses for poor returns, the report’s authors said.
More notably, fresh investor scrutiny, including from corporate activists who routinely issue demands for change in the executive suite, is linking a poor stock price with a CEO’s tenure, the report’s authors said.
“Boards often want to get ahead of any activist who may make changing the CEO one of their first requests,” Jones added.
In the last few months, U.S. companies Starbucks and Bloomin’ Brands changed CEOs and Swiss multinational Nestle replaced its CEO. Activists pushed for CEO changes at Southwest Airlines, where Bob Jordan kept his job, and are pressing Air Products and Chemicals’ board to lay out a succession plan for its octogenarian CEO.
Even as boards are now quicker to throw out CEOs at underperforming companies, the report found that boards have stuck with traditional recruiting patterns.
They prefer company veterans who are well-versed in the corporate culture, have shown loyalty to the organization and could move into the job with minimal disruption.
This year, 77% of new S&P 500 CEOs and 59% of new Russell 3000 CEOs were insiders, the data show. Last year, it was 74% at S&P 500 companies and 64% at Russell 3000 companies. Nearly half of the insiders promoted to the CEO previously served as chief operating officer, president or chief financial officer.
The report shows the number of female CEOs has reached a historical high of 9.5% in the S&P 500 and 7.6% in the Russell 3000. But all were hired at smaller companies with less than $5 billion in revenue and most were hired in the health care, consumer discretionary and materials sectors.
“Overall, the outcome of the succession process looks quite similar to what it has been the last decade, with companies leaning towards white men in their early 50s who have been chief operating officers,” said co-author and Georgetown University professor Jason Schloetzer.
(Reporting by Svea Herbst-Bayliss; Editing by Jamie Freed)
