Planning for the succession of a founder CEO or even a successful, long-serving CEO is a difficult topic for any board. It is also personally challenging for many CEOs.
One succession approach is to name a new CEO and transition the former CEO into an executive chair (EC) role, ideally retaining their expertise and experience while the new CEO gets up to speed. Observing this trend, we decided to explore a fundamental question, “Does having the outgoing CEO transition to executive chair enhance business performance?”
For context, 203 U.S.-based public companies with a market cap of at least $500 million have an executive chair today, a 56 percent increase since 2020 when 130 companies had an executive chair. Executive chairs in our study have been in their roles for a little less than two years on average, and most boards with an executive chair have an independent lead director. The majority of executive chairs, 57 percent, were CEO prior to becoming executive chair; 29 percent were a founder or co-founder of the company.
When we examined the performance of these companies over the course of the executive chair’s tenure, we found that more than half — 54 percent — underperformed their peers, by an average of 14 percent.1 The remaining 46 percent overperformed by an average of 14 percent. Similar research on top listed companies with the executive chair model in Italy, Spain and Switzerland also showed mixed performance.
Our research suggests there can be an upside to having an executive chair — when done right. To learn more, we spoke with executives who have been through this journey about how to manage a successful transition to executive chair and how to avoid the risks of having two prominent leaders at the helm. Here are four main ground rules to consider if contemplating this approach:
- The handover should be clear, visible and quick.
- Building trust is key to success.
- The executive chair and CEO need to be clear about the division of labor.
- The board should be built around the needs of the new CEO.
1. There can only be one CEO, so the handover should be clear, visible and quick
A recurring theme shared by those who got it right is that a successful transition requires the unwavering support of the outgoing CEO. If the CEO has second thoughts about transitioning out of the role, or even the smallest interest in retaining operating authority, alternative succession plans should be considered. Approaching the role with the right intention is crucial for success. This is not a shared CEO role.
To build an effective CEO/EC relationship, it is imperative that the executive chair’s only interest is seeing his or her successor succeed. It cannot be about defending legacy or protecting the status quo. There can only be one CEO, and it must be clear to both the internal organization and outside shareholders who that is. The board and outgoing CEO will need to accept that the new CEO will do things differently, sometimes casting support behind different strategies or leaders. Many successful executive chairs share the belief that the board needs to be clear and resolute in their encouragement and backing of the new CEO, even when their style or ideas diverge from the past.
The outgoing CEO should reinforce the transfer of decision-making power with visible cues to the organization, for example, giving the new CEO their office, reminding former direct reports to go to the new CEO, removing themselves from CEO distribution lists and limiting attendance in regular executive meetings. Successful executive chairs told us that these informal actions have a big impact on the organization’s view of and belief in the successor. The larger organization can more rapidly align behind the new CEO when they see the board and exec chair’s visible support of the successor.
One recent exec chair further reinforced the need to make the handover quickly. A slow release of responsibility is likely to confuse the organization and hamper the success of the next CEO. Moving quickly does not just refer to the initial transition, but also when the executive chair transitions out of the role. Our research found that companies tend to have superior performance when executive chairs have shorter tenures (less than a year).
1 Performance was measured using CAGR which discounts performance by the number of years and is not purely cumulative as opposed to TSR. We then compared average company CAGR values over the executive chair’s tenure to the average CAGR of their relative peer group. Peers were generated using S&P Capital IQ’s back-end algorithm that factors in (1) analyst coverage (2) financials/trade price requirement (3) company location (4) revenue and (5) industry coverage. Companies with executive chairs that are public, U.S. based, and have a market cap of +500M were included in the analysis.