The Handpicked CEO Successor

Abstract

The shareholders of public corporations have considerable interest in the choice of individual to serve as CEO of their company. They want to be assured that the company has a viable plan in place to replace the current CEO if necessary.

Historically, boards have deferred to outgoing CEO, allowed them to pick their own successors. Current governance standards have moved away from this practice. And yet several companies today still defer to the recommendation of the CEO when making a final decision.

We discuss handpicked successors in greater detail and ask:

• Under what conditions are they likely to succeed? When are they more likely to fail? • How does the board gain access to the valuable information that a CEO can offer about potential candidates, without it being inappropriately filtered by personal bias? • When should the board exclude the outgoing CEO from the selection process?

The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: CEO succession, succession planning, handpicked successors, corporate governance

JEL Classification: G3, G30, G34