The Roles Boards Play in CEO Succession Planning

A lack of CEO succession planning increases business risk as disruption is more likely during a CEO transition. One difficulty of examining the importance of CEO succession planning is that the planning process is difficult to observe and evaluate. The main purposes of this dissertation are two-fold. First is to investigate whether CEO succession planning matters by comparing disruption costs in firms with planned departure and those with unexpected CEO departures due to death and illness. The second purpose is to investigate whether inside or outside directors improve organizational resiliency using the context of sudden CEO departures when CEO succession planning is not possible and the former CEO is not available for consultation. Using a unique hand-collected data set of CEO turnovers from 1996 to 2009, I find evidence that firms with unexpected CEO departures have significantly shorter lead-time and greater disruption costs, compared to firms with planned CEO departures. Specifically, shorter lead-time is associated with less favorable cumulative stock performance and greater reduction in capital expenditure around the incumbent CEO’s departure. These results may indicate that a lack of CEO succession planning is associated with greater disruption costs. In fact, a lack of succession planning could cost firms approximately $136 million if the incumbent CEO departs unexpectedly. In addition, firms with both inside directors other than the CEO and well-connected outside directors are most resilient, whereas firms with neither non-CEO inside directors nor connected outside directors are least resilient and suffer the most. In addition, firms with greater inside director presence are less likely to engage in big bath accounting, i.e., taking advantage of the departure to largely write off assets.