ECGI Conversation - Antonio Mello

Dr Tom Gosling interviews Prof. Antonio Mello, Frank Graner Distinguished Chair in Finance at the University of Wisconsin-Madison and ECGI, to discuss his paper: 

“Why Do Firms Often Not Have a CEO Succession Plan?” co-authored with Francesco Celentano, Assistant Professor of Finance at University of Lausanne. 

The key discussion points are:

• CEO succession plans are crucial due to the significant impact a CEO's departure can have on a company. Annually, 10% of CEOs leave, and the costs associated with turnover are substantial. However, despite regulatory requirements, 40% of publicly listed companies do not have a succession plan.

• Companies with a CEO succession plan tend to experience lower pecuniary losses when a CEO leaves, especially if the successor is appointed internally. They also recover faster from forced CEO turnovers and see less decline in profitability. While the financial costs of adopting a succession plan are minimal, the long-term benefits include reduced losses and quicker recovery.

• Boards often hesitate to approve succession plans due to potential tensions with the CEO and personal costs for board members. Identifying a potential successor can create complications, and a lack of a succession plan can signal deeper governance issues. Not adopting a plan can indicate poor execution of fiduciary duties within the board.

• The adoption of a succession plan is more likely when a CEO’s departure is imminent or when the CEO has been in place for a longer period. Companies with more independent directors may face fewer conflicts of interest but struggle with execution. A model suggests that boards are more inclined to adopt a plan when profitability declines or when a CEO’s departure seems certain.

• A well-established succession plan helps boards avoid ineffective CEOs and retain good ones. The SEC could play a role by enforcing proper processes for succession planning, while institutional shareholders could ensure the adoption of these plans through stricter voting policies. Proper succession planning ultimately supports better decision-making and company stability.

   

We hope you enjoy the conversation. For more interviews in this series, visit this page.