Weekly Business Insights from Top Ten Business Magazines | Week 314 | Leading & Managing Section | 3

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 314 | September 15-21, 2023

Promoting your ex-CEO to executive chairman is a recipe for trouble. So why are so many companies making that mistake?

By Geoff Colvin | Fortune Magazine | August 29, 2023

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The “executive chairman” phenomenon is an increasingly popular element of leadership succession. Whether that’s a good thing is far from clear. In a study companies with an executive chair underperformed those without one.  That result shouldn’t be surprising. Most new CEOs want to make changes, and “it is very difficult to have the former CEO sitting in the room.  Paralysis may follow. Appointing an executive chair and a separate CEO also confuses employees. 

With all those forces pushing against the concept of the executive chair, you have to wonder why companies increasingly use it. “What is the problem this arrangement solves?”  The answers to such questions says a lot about changes in the job market for experienced CEOs over the past couple of decades.

The most common rationale for elevating the outgoing CEO to executive chair begins with the growth of private equity firms. To run their portfolio companies, those firms often hire CEOs away from publicly traded corporations. Boards of directors sometimes feel these novices should be eased into the new job, and an executive chair, the thinking goes, can carry some of the burden, at least for a while.

A different rationale, never voiced publicly, is a response to the outgoing CEO’s power within the organization. “If the outgoing CEO wants to continue [with] a compensation package that is closer to that of a CEO than an on-demand consultant, it’s hard to do that without a more formal role. The departing chief may also hold leverage if the board wants them to make unpleasant changes, such as firing a high-level executive or cutting costs, before handing over the CEO title.   Executive chairs can work out well, especially if they don’t stay long. 

The future of the executive chair position will be shaped by a three-way tussle among institutional investors, nervous boards of directors, and powerful outgoing CEOs. A continuation of the retiring-upward trend, “especially as the sense of macro uncertainty plays out.” What shouldn’t be in doubt in any succession is the true meaning of that seemingly bland title. “When you’re executive chair, the buck stops with you. “It’s a title change with little meaning. You’re still running the show. Period.” 

3 key takeaways from the article

1. The “executive chairman” phenomenon is an increasingly popular element of leadership succession. Whether that’s a good thing is far from clear. In a study companies with an executive chair underperformed those without one.
2. The most common rationale for elevating the outgoing CEO to executive chair begins with the growth of private equity firms. To run their portfolio companies, those firms often hire CEOs away from publicly traded corporations. Boards of directors sometimes feel these novices should be eased into the new job, and an executive chair, the thinking goes, can carry some of the burden, at least for a while.
3. The future of the executive chair position will be shaped by a three-way tussle among institutional investors, nervous boards of directors, and powerful outgoing CEOs.

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Topics:  Leadership, Board of Directors, Succession