The Handbook of Board Governance, 2nd Edition

3CEO Succession Planning

David F. Larckerand

James Irvin Miller Professor of Accounting, Stanford Graduate School of Business

Professor of Law (by courtesy), Stanford Law School

Director of the Corporate Governance Initiative and Senior Faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford

Brian Tayan

Researcher, Corporate Governance Research Initiative, Stanford University Graduate School of Business

As part of its oversight function, the board of directors is responsible for ensuring that correct management is in place to run the organization. This includes hiring, evaluating, and—when circumstances merit—removing or replacing the chief executive officer.

In this chapter, we review the process by which board members carry out this function. We start with an overview of the market for CEO talent and examine the individuals that serve in this role, their backgrounds, and attributes. We then explore how frequently companies change CEOs—specifically, how responsive boards are in terminating underperforming chief executives. Next, we consider incoming CEOs, including whether replacements are primarily sourced from within or outside the company and how this decision impacts future performance. We end by reviewing the various models that companies adopt to plan for succession events, and evaluate the tradeoffs implicit in their selection.

We will see that, while organizations are inconsistent in how effectively they manage the CEO evaluation and replacement ...