CEO succession findings: Additional criteria for success, not enough progress on diversity

The events of 2020 raised the uncertainty in our global society to unprecedented levels. In response, early in the year, we saw many companies, large and small, opting for stability when it came to their leaders. Sometimes, to mitigate any potential risks that may accompany leadership transitions, these companies chose to pause new CEO appointments until the effects of the COVID-19 pandemic and the increased focus on ensuring racial and social justice were clearer.

But companies reengaged in the second half of the year and, by the end of 2020, CEO turnover at S&P 500 and Russell 3000 companies substantially matched the average of the previous four years. Boards on the whole opted for permanent CEOs rather than interim appointments, signaling that they are confident in their choices and are making decisions for the long term.

There are other signals that boards are making leadership decisions with a longer-term horizon in mind and with broader performance criteria than we have seen previously. For example, even great financial performance did not protect CEOs from the consequences of misconduct related to corporate values and workplace culture.

In terms of positive steps CEOs can take, we see an explicit expectation that they will champion diversity, equity, and inclusion (DE&I), employee wellbeing, purpose, and sustainability throughout the talent acquisition and development process. This is a more rounded profile for the CEO role and the additional requirements may make a great CEO even harder to find. We expect significant additional pressure on succession planning and leadership development as a result. Boards and CEOs that focus on building great executive leadership teams with attention to all these criteria will give themselves a running start.

CEO succession today

We see three key trends emerging from the 2020 CEO appointments made in the Russell 3000:

Trend #1: CEO turnover returned to pre-pandemic levels after a slow start. In 2020, CEO succession is a story of two halves. The first six months showed a slowdown, with, for example, only 71 CEO changes in the Russell 3000 index companies, 11 percent lower than the average turnover of the two prior years. But the number of new CEO appointments picked up significantly in the second half of the year and brought the annual average in line. One reason we have seen for the uptick is more CEOs stepping down in the latter half of the year, burned out from leading through the first half. The scale of CEO change varies among sectors, from 21 percent in Utilities to 7 percent in Real Estate. When companies did make a change, it was more often permanent: interim CEO appointments averaged 16.5 percent in 2020, compared with 23 percent in 2019.

Trend #2: Financial performance alone is not enough to remain CEO. The gap between the succession rates of better performing and worse performing companies narrowed sharply in 2020, to the lowest point in nearly 20 years. While total shareholder return continues to be a key predictor of CEO turnover, extra-financial performance indicators that measure how CEOs promote a diverse, fair, and inclusive workplace; their approach to sustainability issues such as climate change or community engagement; and how they protect employees’ security and wellbeing—particularly burnout and mental health—are all increasingly important performance metrics. All of these elements are coordinated and linked to the company’s purpose, so it’s important for leaders to get it right. We believe that a thriving culture is at the core of making all these elements work well together, and that ensuring the company has one should be a top priority for boards and CEOs.

Trend #3: Little progress, or disclosure, is made on diversity. Even as scrutiny of companies’ DE&I efforts became more stringent than ever, 2020 showed only incremental gains in gender representation. Across Russell 3000 companies, 5.7 percent of CEOs are female, a net increase of only eight CEOs in 2020; those appointments came from smaller companies, while gender diversity stalled or declined among larger firms. Companies disclose far less information about racial and ethnic diversity: in 2020, as much as 98.9 percent of Russell 3000 and 96.2 percent of S&P 500 companies still did not include in their proxy statements any information about the ethnic background of their CEO; of the companies that did provide this information, approximately 90 percent of S&P 500 CEOs identified as White/Caucasian.

Looking ahead

As the criteria for CEO success are evolving into a combination of financial metrics and extra-financial indicators (such as a good DE&I track record and commitment to sustainability and employee wellbeing), so too is the level of scrutiny from boards, investors, consumers, and regulators. The lack of progress on diversity across Russell 3000 and S&P 500 leaders is one key area of focus for Heidrick & Struggles. Some recent appointments indicate progress. But we believe that boards must become more transparent about their diversity statistics in order to meet increasing stakeholder demands. In addition, boards must widen not only their criteria for CEO success but also the networks they use to find potential CEOs and the range of people they choose for leadership development programs. (For more, see Meeting the Inclusion Imperative: How Leaders Can Link Diversity, Inclusion, and Accelerated Performance.)

Boards and companies can make use of a wide range of tools as part of these programs, such as CEO simulation and role playing, in which an external candidate can be trained and tested by the board through special tasks and stretch assignments; CEO apprenticeship, in which a CEO candidate works before the official succession announcement with the sitting CEO on a number of strategic and highly visible tasks; and coaching and mentorship focused on developing the skill sets and leadership capabilities of the entire executive leadership team. Heidrick & Struggles’ experience has shown that leadership development programs should additionally focus on honing the following key skills: leading through influence, driving execution, creating possibilities for new thinking, and having an ownership mindset.

Finally, the world-changing events of 2020 provided plenty of opportunity for boards to rethink their approach to CEO succession planning and assess how potential successors responded as leaders. We encourage boards to ensure they have robust succession plans, permanent and interim, to cover all scenarios, with potential internal and external CEO candidate pools that include diverse talent. (For more, see “The clock is ticking on CEO succession: Is your board ready?” and “Considerations for emergency CEO successions.”)

As companies are now firmly focusing on the future, finding the right CEO at the right time requires a pitch-perfect succession plan—dynamic, real-time, and with access to a diverse pool of candidates with the full range of experiences and capabilities to succeed.