Change at the top hits the bottom line

2005

Poor succession planning is wiping £2 billion a year from the stock market value of FTSE 350 companies - equivalent to 0.6 per cent of total UK annual company profits, according to a new research study sponsored by Investors in People (IIP).

The report, carried out for Investors in People by the Centre for Economics and Business Research (CEBR), analysed movements in share prices of companies experiencing at least one change in CEO between May 2002 and May 2005.

It found that companies with clear succession plans performed more than seven per cent better on the markets a week after their change than those that delayed appointing a replacement.

The study reveals that the effect continues in the longer term too. Over the period of the study, companies with unplanned successions - where no replacement was immediately announced to the markets - saw their share prices fall by 2.1 per cent more than their peers with planned succession processes.

Some 15 per cent of the changes over the three-year period were classified as unplanned.

The strong message from the analysis is that the markets dislike change. On average, companies performed 9.6 per cent worse than their competitors over the three years for each change of CEO.

Effective succession planning clearly helped to mitigate this effect, but could not remove it entirely. Over the same three-year period, however, companies with no changes at the top saw their share prices outperform their benchmark by 3.6 per cent.

The research also found that companies prefer to promote new CEOs from within, with almost two thirds of new CEOs announced during the period of the study being internal appointments.

This also appears to have had a significant effect: on average, companies that promoted from within performed 11.7 per cent better over the three years than those recruited from outside.

"Succession planning can have a major impact on market value, and so clearly is an issue that no company can afford to ignore," said Ruth Spellman, Chief Executive of IIP.

"Businesses need to have systems in place to ensure that they are prepared when senior managers leave - whether it is expected or not.

Susan Bloch, Managing Director ofLeadership Solutions Group at Whitehead Mann, added that succession planning should be seen as an integral element of good corporate governance.

"An objective look at succession planning should form part of any Board audit," she said.

"It's also important to help executives prepare properly for the transition into the new role using tools such as coaching."