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Analyzing Credit and Governance Implications of Management Succession Planning

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Abstract

Oversight of CEO and senior management succession planning has always been a critical board responsibility, but recent high-profile CEO departures have brought the issue to the fore. Changes at a number of high profile issuers recently have highlighted the risks companies may face due to sudden, unforeseen CEO and senior management departures or dismissals. Moody's expects unprecedented investor and media attention on succession issues in 2008, due to factors that include: fallout from the turmoil in the financial markets; a more challenging operating environment; and continued pressure from activist investors. Within this context, Moody's views effective succession planning - in particular CEO succession planning - as critical to the sound management and oversight of an organization. While we analyze succession issues on a case-by-case basis, and while the degree of headline risk may vary, we have found there are a number of processes and best practices that help to instill investor confidence and reduce risk, based on our governance reviews of over 700 North American companies. This special comment describes how Moody's views best practices for the role of boards in overseeing succession planning and management development. This comment is part of a series of Moody's reports that describe the benchmarks against which Moody's evaluates the quality of corporate governance within rated issuers as part of determining the effect of governance on those firms' debt ratings.

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... However, family firms face a major challenge when it is time to 'pass on the baton' as the retiring family CEOs often appoint their offspring as successors (Plath, 2008). More specifically, Bertrand and Schoar (2006) argue that the firm's family founders may be subject to 'dynastic thinking', resulting in the top management jobs being filled with their relatives rather than more talented nonfamily managers (Barnett, 1960). ...
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This paper studies the factors that influence the CEO succession decision in family firms whose incumbent CEO is a member of the controlling family. The sample includes all such firms from France, Germany and the UK. We propose a new measure of directors’ independence, which adjusts for various links with the controlling family. While we find that conventionally defined directors’ independence has no impact on the CEO succession decision, our corrected measure reduces the likelihood of the successor being another family member. There is also evidence that firms from France that are cross-listed in the UK or USA are less likely to appoint another family CEO.
... However, family firms face a major challenge when it is time to 'pass on the baton' as the retiring family CEOs often appoint their offspring as successors (Plath, 2008). More specifically, Bertrand and Schoar (2006) argue that the firm's family founders may be subject to 'dynastic thinking', resulting in the top management jobs being filled with their relatives rather than more talented nonfamily managers (Barnett, 1960). ...
Article
Full-text available
This paper studies the factors that influence the CEO succession decision in family firms whose incumbent CEO is a member of the controlling family. The sample includes all such firms from France, Germany and the UK. We propose a new measure of directors’ independence, which adjusts for various links with the controlling family. While we find that conventionally defined directors’ independence has no impact on the CEO succession decision, our corrected measure reduces the likelihood of the successor being another family member. There is also evidence that firms from France that are cross-listed in the UK or USA are less likely to appoint another family CEO.
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