This document summarizes a study of CEO succession events among the largest 100 U.S. corporations between 2005-2015. The study analyzed executives who were passed over for the CEO role ("succession losers") and their subsequent careers. It found that 74% of passed over executives left their companies, with 30% eventually becoming CEOs elsewhere. However, companies led by succession losers saw average stock price declines of 13% over 3 years, compared to gains for companies whose CEO selections remained unchanged. The findings suggest that boards generally identify the most qualified CEO candidates, though differences between internal and external hires complicate comparisons.

1. Stanford Closer LOOK series
Stanford Closer LOOK series 1
By David F. Larcker, stephen a. miles, and Brian Tayan
october 11, 2016
Succession “losers”
What happens to executives passed over for the ceo job?
introduction
Shareholderspayconsiderableattentiontothechoiceofexecutives
selected as new CEOs whenever a change in leadership takes place.
Although it is not precisely known how large a contribution an
individual CEO makes to the success of an organization overall,
the general perception is that the CEO is crucial to long-term
performance, and shareholders are interested to know that the
most qualified candidate has been identified among those vetted
for the top job during a succession event.1
However, to the outside world, the CEO selection process
might be characterized as a “black box.” Shareholders and the
public alike do not know when a succession event might occur,
who the leading candidates are, whether the corporation has
adopted a rigorous process to develop and evaluate them, and
whether the most qualified person was ultimately selected. While
the research literature does not shine a clear light on these issues,
the available evidence is not particularly encouraging. One survey
of corporate directors finds that most admit to not having detailed
knowledge of the skills, capabilities, and performance of senior
executives just one level below the CEO. Only half (55 percent)
of respondents claim to understand these skills either well or
very well. Most directors (77 percent) do not participate in the
performance evaluation of executives one level below the CEO,
and only in rare circumstances (7 percent) do board members
formally serve as mentors to them.2
Furthermore, research shows
that inadequate talent development and succession planning
negatively impact future corporate performance. For example,
Behn, Dawley, Riley, and Yang (2006) find that the longer it takes a
company to name a successor, the worse it subsequently performs
relative to peers.3
To ensure the long-term success of a corporation, shareholders
therefore want assurance that the board has a sound process in
place to evaluate, develop, and identify the most promising talent.
However, without an inside look at the leading candidates to
assume the CEO role, how can shareholders tell whether boards
are making correct choices?
Succession candidates
One approach to evaluating the quality of a company’s selection
process is to consider the executives who were passed over for the
CEO role. When large corporations—such as Boeing, Disney, or
Bank of America—have a succession event, there is no shortage
of pundits and journalists speculating which executives (internal
or external) are poised as “leading contenders” to take over. In the
end, only one executive emerges with the job. What happens to
those who were not selected (i.e., the “succession losers”)? If they
go on to great success as the CEOs of another company, their
previous company might have missed out on a highly qualified
candidate. Conversely, if they perform poorly as CEO of another
company or remain stuck in positions below the CEO level, their
previous company might have made the correct succession choice.
To provide some initial insight into this question, we studied
all CEO succession events among the largest 100 corporations
between 2005 and 2015. Our total sample included 77 companies
and 121 transitions. Some companies, such as FedEx and Amazon,
had no succession events during this period, while others, such as
the Home Depot and General Motors, had multiple successions.
Mutual companies were excluded from the sample because they
lack publicly traded stock price information.
Among the 77 companies with a succession event, we collected
two sets of information.
Sample 1. The first sample includes the names of all internal,
senior-level executives named in media articles as potential
successors to the outgoing CEO prior to the event.4
Of the 121
total transitions that occurred during the measurement period,
46 (38 percent) had only one named successor, and no executives
were identified as “passed over.” For example, when William
Harrison Jr. stepped down as the CEO of JPMorgan Chase in
2005, Jamie Dimon was the sole candidate speculated to take over.
However, the remaining 75 transitions (62 percent) had more
than one named successor, and 100 executives at these firms were
identified as passed over.
Of these 100 executives, 26 percent chose to remain at the

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company, and 74 percent left. Among those who left, 30 percent
eventually went on to become the CEO of another company.5
For
example, Ed Shirley who was passed over as the CEO of Procter &
Gamblein2009becametheCEOofBacardi,andSheriMcCoywho
was passed over as the CEO of Johnson & Johnson in 2012 became
the CEO of Avon Products. Most executives who are passed over,
however, do not become CEO at other firms. Forty-one percent
either take a position below the CEO level, join an advisory or
financial firm, go into private equity or venture capital, or start an
independent consulting firm. Thirty percent fully retire, although
many of these continue to work in retirement by serving on the
boards of other corporations.
Sample 2. The second sample includes senior-level
executives—such as the CFO, COO, and divisional presidents—
who were not named as potential successors in the media but
who resigned their position within the year preceding or the year
following a succession event. (We collected information on this
sample of executives because media articles are not definitive, and
prominent executives who are not externally identified as CEO
candidates might still be candidates or consider themselves to be
potential candidates.)6
In total, we identified 34 additional prominent executives
who departed shortly before or after the succession. Of these,
24 percent eventually became the CEO of another company, 41
percent joined another company in a position below the CEO
level, and 24 percent permanently retired. The remaining 12
percent resigned too recently to determine whether they fully
retired or will join another firm (see Exhibit 1).
Performance. Finally, we studied the stock price performance
of the succession “winners” against that of the executives who
became the CEO of another publicly traded firm after being
passed over.7
We identified 17 such individuals. On average, the
succession winners saw 3-year, cumulative stock price returns
that were approximately equal to the S&P 500: These companies
returned 8 percent cumulatively, on average—2 percentage points
below the index level. By contrast, the executives who became
CEO at another company oversaw a 3-year, cumulative loss of 13
percent, on average, compared to a 10 percent gain in the S&P
500—a 22 percentage point differential (see Exhibit 2).
Although it is tempting to conclude that succession “losers”
are associated with poor subsequent performance (perhaps
justifying the fact that they were not selected as CEO by their
original company), one extremely important caveat is in order.
The research literature routinely shows that companies that hire
external CEOs tend to perform worse than those who promote
internal executives. One reason for this result is that companies
that recruit external CEOs tend to be in worse financial condition
than those that promote an internal executive. The very fact
that they go to the external market to hire a CEO suggests that
no internal candidates are viable or that the company requires
wholesale changes that an internal candidate is less likely to be
able to achieve. All succession losers who join another firm as CEO
are, by definition, external hires and fall under this qualification.8
In our sample, the companies that hired succession losers also
exhibited negative relative stock-price performance for the six
months prior to hiring them.
Nevertheless, in aggregate, our data modestly suggests that
corporate boards do a reasonable job of identifying CEO talent.
Fewer than 30 percent of the executives passed over among large
corporations are recruited by other firms as CEO. Most (over 70
percent) are not. If an executive who is passed over has valuable
skills that make him or her a viable CEO candidate, it is likely
that another corporation would identify and hire that individual.
This is especially true if the market for CEO talent is as tight
as suggested by firms such as McKinsey & Co. that argue that
companies are in a “war for talent.”9
Furthermore, candidates who are recruited to new firms
after being passed over appear to perform worse (relative to
benchmarks) than those who were selected at the original
company. While it is important not to overweigh these results
because of the qualifications mentioned above, the magnitude
of the difference between their performance suggests that board
members might be more adept at evaluating CEO-level talent
than the broad research literature indicates.
Why This Matters
1. CEO succession events among major corporations garner
considerable external scrutiny from shareholders and the
media. Are the executives ultimately selected for the role
really “better” than those passed over? What information
can shareholders use to assess the decisions made by the
board? What types of disclosures might a firm release to help
shareholders feel comfortable with the succession process?
2. The data suggests that only a small number of executives who
are passed over as CEO become CEO at another company.
What implications does this have on understanding the breadth
and depth of the labor market for executive talent?
3. The data also shows that those who “lose out” in internal
succession races generally do not perform as well at new
companies as those who were instead selected. Is this due to
differencesintheoperatingconditionsofcompaniesthatrequire
an external rather than an internal hire? Or does it suggest

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that board members are better at identifying and assessing the
quality of CEO talent than other research generally suggests? 
1
A survey of corporate directors found that, on average, directors be-
lieve that 41 percent of a company’s overall performance is directly
attributable to the efforts of the CEO. Scientific research on this topic
is considerably varied with estimates ranging from approximately 4
percent to 35 percent, depending on methodological assumptions. See
Heidrick & Struggles and the Rock Center for Corporate Governance at
Stanford University, “CEOs and Directors on Pay: 2016 Survey on CEO
Compensation,” (2016). For a review of the research literature on CEO
performance, see David F. Larcker and Brian Tayan, “CEO Attributes and
Performance,” Quick Guide Series: Research Spotlight (2016), available
at: http://www.gsb.stanford.edu/faculty-research/publications/
ceo-attributes-firm-performance.
2
The Conference Board, The Institute of Executive Development, and
the Rock Center for Corporate Governance at Stanford University,
“How Well Do Corporate Directors Know Senior Management?” The
Conference Board Governance Center, Director Notes (2014).
3
Bruce K. Behn, David D. Dawley, Richard Riley, and Ya-wen Yang,
“Deaths of CEOs: Are Delays in Naming Successors and Insider/
Outsider Succession Associated with Subsequent Firm Performance?”
Journal of Managerial Issues (Spring 2006). See also, David F. Larcker and
Brian Tayan, “Sudden Death of a CEO: Are Companies Prepared When
Lightning Strikes?” Stanford Closer Look Series (March 6, 2012).
4
This approach assumes that media speculation is somewhat valid. We
are not aware of other public data sources where potential successors
are identified.
5
This includes publicly owned, privately owned, private-equity backed,
venture-capital backed, and other startup companies. This does not
include consulting or advisory firms founded by the departed executive.
6
The two samples are kept separate because executives in sample 1 might
choose to remain at the company, while all executives in sample 2 left
(by definition). Note that it is impossible to determine whether a senior-
level executive leaving close to a succession event did so voluntarily or
involuntarily.
7
Here we combine executives from sample 1 and sample 2 because they
all become CEO. Executives who become CEO of private companies are
excluded because stock price information is not available.
8
By comparison, 82 percent of the CEO “winners” in this subsample were
internal hires, while 19 percent were external hires.
9
See Elizabeth G. Chambers, Mark Foulon, Helen Handfield-Jones,
Steven M. Hankin, and Edward G. Michaels III, “The War for Talent,”
McKinsey Quarterly (1998).
David Larcker is Director of the Corporate Governance Research
Initiative at the Stanford Graduate School of Business and senior faculty
member at the Rock Center for Corporate Governance at Stanford
University. Stephen Miles is Chief Executive Officer, The Miles Group.
Brian Tayan is a researcher with Stanford’s Corporate Governance
Research Initiative. Larcker and Tayan are coauthors of the books
Corporate Governance Matters and A Real Look at Real World
Corporate Governance. The authors would like to thank Michelle
E. Gutman for research assistance in the preparation of these materials.
The Stanford Closer Look Series is a collection of short case
studies that explore topics, issues, and controversies in corporate
governance and leadership. The Closer Look Series is published
by the Corporate Governance Research Initiative at the Stanford
Graduate School of Business and the Rock Center for Corporate
Governance at Stanford University. For more information, visit:
http:/www.gsb.stanford.edu/cgri-research.
Copyright © 2016 by the Board of Trustees of the Leland Stanford Junior
University. All rights reserved.

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Exhibit 1 — succession losers (2005-2015)
Note: Named successors are executives who are named in newspaper articles as potential leading candidates to succeed the outgoing CEO. Executives who
leave to become CEO at another company do not include those who start their own company. Executives who retire include those who continue to serve on or
join new corporate boards but do not contract with a new full-time employer. Sample 2 includes senior executives not named in articles as potential successors
but who leave within approximately 15 months before or after a succession event.
Source: Research by the authors.
.
Sample 1: Named Successors
Transitions: total 121
Transitions: one named successor 46 38%
Transitions: more than one named successor 75 62%
Number of executives passed over for CEO job 100
Of these, number who stay 26 26%
Of these, number who leave 74 74%
Leave who become CEO at another company 22 30%
Leave who become executive (below CEO) at another company 30 41%
Leave who permanently retire 22 30%
Sample 2: Other Executives
Number of other executives who leave around succession 34
Leave who become CEO at another company 8 24%
Leave who become executive (below CEO) at another company 14 41%
Leave who permanently retire 8 24%
Unknown (left too recently to determine) 4 12%

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Exhibit 2 — succession winners and losers: stock price performance
Note: Sample excludes executives who become CEO of a privately owned, private-equity backed, venture-capital backed, or startup company. Sample of
succession winners includes only companies where succession losers went on to become CEO of another public company. In one case more than one succession
loser went on to become CEO of another public company. Stock price performance calculated as the 3-year change in price from the executive’s first day as CEO,
or ending on December 31, 2015 for CEO tenures that began less than 3 years before this date. S&P 500 and relative performance calculated for each executive
over the same date range. S&P 500 returns differ across subsamples because succession winners and losers begin their CEO tenure on different start dates.
Source: Stock price information from Center for Research in Securities Prices (University of Chicago). Calculations by the authors.
.
Stock Price Performance
Succession losers who become CEO at another public company 17
Stock price performance
3-year cumulative return -13%
3-year cumulative return, S&P 500 9%
3-year cumulative return, relative to S&P 500 -22%
Succession winners of the original company 16
Stock price performance
3-year cumulative return 8%
3-year cumulative return, S&P 500 10%
3-year cumulative return, relative to S&P 500 -2%