Is Your Board Prepared for the Next CEO Transition? Director and Expert Insights

As companies face inevitable leadership changes, boards must ensure smooth CEO succession and transitions, maintain organizational stability, and uphold fair and competitive executive compensation practices. During this session, Greg Arnold, managing director at Semler Brossy; Cammie Dunaway, board director at Flo Health Inc., Planet Fitness, and Wonder Project; Christine Heckart, CEO and Founder, Xapa; Board Director, Contentful, SiTime; and Vanessa Ruda, senior partner and central region leader at RHR International discussed rising CEO turnover, its implications, proactive planning for CEO transitions, and techniques for maintaining organizational stability during transitions

VIEW THE RECORDING

KEY TAKEAWAYS

Background: Rising CEO Turnover and Its Implications

• In 2024, nearly 2,000 CEOs left their positions, marking a 16 percent increase from the previous year, driven by both forced and voluntary departures.
• This rising turnover reflects heightened pressures on CEOs, including increasing demands on leadership roles, rapid changes in technology, and the socio-political environment.
• Each CEO transition is unique, shaped by both internal and external factors, requiring a tailored approach to ensure stability and continuity during the leadership change.
• According to the NACD 2025 Trends and Priorities Survey, 59 percent of directors believe the board-CEO relationship needs improvement, highlighting the importance of this relationship in ensuring smooth transitions.

Preparation Is Key: Proactive Planning for CEO Transitions

• Boards must align leadership needs with the company’s current strategy and future goals.
• Proactively preparing for transitions involves assessing both talent and external factors, such as technological advancements or regulatory changes that may influence the future direction of the company.
• In approximately half of S&P 500 companies, outgoing CEOs transition into the chair role to ensure continuity—approximately two-thirds are short-term and last for 12 months or less. While this can be beneficial during transitions, the board must maintain its leadership authority to avoid undue influence from the former CEO.
• Proactively socialize succession case studies with the board, and incorporate succession planning into regular board discussions, making it part of the standard governance framework (even in the good times).

Maintaining Organizational Stability During Transitions

• Stability around the CEO in the board leadership and key management positions is often critical if minimizing disruption across the organization is important.
• Clear communication with key stakeholders—including employees, investors, and the market—helps reassure them about the company’s direction.
• The board must ensure that all stakeholders understand the reasons for the transition, reaffirm the company’s strategy, and highlight why the new leadership is well-equipped to steer the company forward.

Role of Compensation and Governance in CEO Transitions

• Executive compensation must align with the company’s long-term strategy and shareholder expectations. The board plays an essential role in designing compensation frameworks that not only incentivize performance but also support long-term sustainability. Key compensation trends include:
  • Performance Shares & Long-Term Vesting: There is increasing openness from institutional investors, and Institutional Shareholder Services, on whether performance shares should remain part of executive compensation, especially with long-term vesting periods of five to 10 years. This shift reflects growing concern over the effectiveness of performance shares. A long vesting clearly has implications around executive tenure and succession planning.
  • Durability of Compensation Programs: Compensation plans should be designed to remain effective regardless of the company’s performance. It’s important for boards to align executive compensation with the CEO’s tenure, ensuring that programs support both sustainable performance and succession planning.
  • Decline of Staking Grants: Staking grants are becoming less common in public companies due to shareholder pushback. Sign-on grants as part of a buyout require more transparency and detailed disclosures to meet shareholder expectations and reflect the evolving landscape of executive compensation.
• Regularly evaluate executive compensation to ensure it remains aligned with the company’s evolving strategy and leadership goals. These reviews help ensure that both the compensation structure and the CEO’s objectives are in sync with the company’s broader goals.
• Be deliberate in defining the roles and responsibilities of both the board and management to provide a solid foundation for a smooth transition, minimizing any ambiguity or disruption.

Planning and Communication

• Boards must have a structured approach to CEO succession, considering both immediate interim successors and long-term replacements. Early identification of potential interim leaders is crucial to ensure a smooth transition without operational disruptions.
• Even when the company is performing well, succession planning should be integrated into regular board discussions. Regularly socialize succession case studies and incorporate these conversations into quarterly board meetings to ensure continuity and preparedness.
• Succession planning should be embedded within the board’s standard governance framework and compensation calendar, making it a continuous and proactive process.
• Effective information flow within the company is critical for understanding organizational performance and CEO effectiveness. The board must prioritize the establishment of clear communication channels and ensure that data is accurately managed to provide a comprehensive view of the company’s performance.

Board and Company Culture

• CEO transitions are an opportunity to reassess and strengthen the company’s culture. Boards should take time to reflect on desired behaviors, values, and communication strategies that support the company’s long-term vision.
• Ensuring alignment between leadership and company culture is critical for maintaining morale and sustaining the company’s strategic direction during a leadership change.
• Trust is the cornerstone of effective communication between the board and CEO. Building trust requires consistent and meaningful interactions, such as board dinners or informal gatherings, where candid discussions can take place.
• Personal relationships help cultivate an environment where honest, critical conversations are possible, enabling the board and CEO to address challenges openly and collaboratively.

Thank you to our generous partners for making this event possible.