In September 2014, the Talent Equity Institute published research about CEO succession from 2003 to 2013 in 160 leading Russian companies (for more information, see Talent Equity Newsletter № 7). While continuing our research on this topic, we would like to present CEO Succession 2014 – an overview of the primary trends that occurred in the turnover of general directors during the past year.
Rate of CEO turnover remains high, and could possibly increase in 2015
In 2014, 22 of the 160 leading Russian companies replaced their general director. This figure is slightly lower than that of the 2013 year, which had 24 replacements. However, looking at the cyclical nature of succession (peaks and valleys with 30% variance starting in 2007 – see Fig. 1), we can assume that the next (2015) year will set a record for new incoming leaders, just like during the 2009 crisis.
No more industry stability
The insurance, metallurgy, and construction industries had the highest number of replacements last year. Though the metallurgy industry has been characterized by frequent CEO replacements, the construction and insurance industries have demonstrated relative stability over the past decade. A sharp increase in the number of replacements in a given industry can indicate a systemic crisis. There also tends to be a domino effect within industries – if a major market player appoints a new general director, other companies will also look to change their CEO.
Private enterprises started to more actively replace their general directors
Another significant change is the increase in succession within private companies that have a single proprietor. Over the past decade, these kinds of companies were the most stable, with each company replacing its CEO an average of just 1.6 times. In 2014, already 13% of private companies with a single proprietor have changed leadership, which gives them the second highest number of CEO replacements (after public companies with one owner) when compared with all other types of companies. Does this mean that Russian company owners have begun to retire and pass their responsibilities on to a hired manager? (As we noted earlier, fathers passing companies on to their children is unique to the Russian market.) In a crisis economy, many managers that foresee poor outcomes will shift responsibility for those results onto hired managers and formally leave their managerial roles. In doing so, they may be trying to keep their reputations as effective owners from being tarnished.
Demographic characteristics of successors are slowly changing
Coming into 2014, the typical CEO’s portrait didn’t differ much from that of the former average successor – 45-46 years old, 10% expat, extremely few women (in 2014, the sparsely populated club of women CEOs consisted of Elena Zhuravleva, CEO of the Nezavisimost family of companies). The vast majority (88%) have work experience in the same industry as their new company.
In 2014, there was a decrease in the number of CEOs with substantial work experience in government or law enforcement agencies – 15% vs. the average of 25%. This is largely due to the fact that few state-owned companies (who usually hire these candidates) replaced their CEOs last year.
The number of “lifers” (CEOs who have spent their entire careers at one company) increased: 18% vs. the average of 10%, which is still relatively low compared to other markets.
With regards to a new appointee’s functional knowledge, most managers had manufacturing and technical experience (55%), while only half of that had a background in finance (28%).
The role of business education in successor selection remains ambiguous – only 2 appointees last year had MBAs.
A boom in the promotion of internal candidates
One of the most surprising trends from 2014 was the record number of internal candidates promoted to CEO. 60% of companies favored promoting insiders, even though an average of only 36% of CEOs over the last 10 years were insider candidates. A high number of insiders is a good indicator of a company’s maturity. The process of transferring responsibility is structured like a relay race: the CEO grooms a successor and, when leaving voluntarily (frequently for retirement), transitions responsibility over to his replacement. However, not all insiders in our sample were deliberately prepared for their future roles.
The decrease in interest towards group insiders and outsiders could speak to how company owners have started to pay more attention to and trust internal candidates. Unfortunately, this trend may be short-lived – during crises, companies are more likely to look to outsiders as “corporate saviors,” as during the 2009 year, which saw a record number of externally-recruited candidates.
High percentage of dismissals and demotions
In 2014, 35% of company CEOs in our sample were dismissed, and another 15% were demoted. These numbers are slightly better than the averages of 39% and 28%, respectively. The average departing CEO was not much older than their successor at 50 years old – which indicates that these are mature managers who are far from retirement age. Only one of five of these managers were leaving the company for a new position (and the overwhelming majority of those instances were transfers to government agencies).
Increasing length of tenure
CEOs who left office in 2014 spent an average of 4.5 years at their position, which is longer than the average term of 3 years (a standard that holds across all categories of successors). While the effectiveness of departing CEOs was higher than the average – only 12% demonstrated results lower than the market average of 27% – there were still a high number of layoffs. This helps to confirm our hypothesis about the weak correlation between CEO turnover and effectiveness.