Corporate Succession Practices and the Impact on Portfolio Returns

Abstract

A publication in HBR claims that succession practices expected to maximize the hiring firm's value reduce shareholders' portfolio value, mainly due to intellectual capital losses at firms supplying talent. This paper substantiates and extends that claim using: literature, direct calculation, portfolio analyses, subsamples, and an economic model. We assume managers' value-maximizing assignment to jobs. The reduction in real returns for the S&P 1500 portfolio is 0.98 percentage points per year. Exceptional executive types do not mitigate this loss. Our research motivates portfolio holders to focus on succession practices and contrasts with research on common ownership. We suggest proxy voting practices.

Keywords: Portfolio, Internal Hire, External Hire, Executive, CEO, Stakeholder Value