Listed corporate organisations in South Africa are mandated as part of their listing requirement, to manage the risk exposure of the enterprise. According to King III, proper succession planning for the CEO and other senior executives must be put in place by the board.
Various studies in the United States demonstrate the negative and positive movement of the share price on the death of a senior executive, the CEO in most instances.
Currently, there is a lack of global research which study the risk and impact thereof to the organization of a sudden and untimely departure by death of the CEO. Furthermore, no studies have been conducted in how organisations manage the risk of an untimely death of a CEO. A common structured approach in the discipline of succession planning or enterprise risk management is currently not well documented.
According to Bennedsen et al. (2006), after studying the impact of top management (chief executive officers and board members) deaths on firm performance, their findings demonstrate amongst other that CEO deaths are strongly correlated with declines in firm operating profitability, asset growth and sales growth. Overall, their findings demonstrate CEOs are extremely important for firms’ prospects.
When the market is aware of the anticipated replacement of the CEO, it does not significantly react to the announcement of the incoming CEO (Rhim, Peluchette, & Song, 2006). Rhim et al (2006) found that the stock market reacts more favourably where the CEO turnover was not anticipated by the market. It can be argued that anticipated events are already priced in to the current share price of the affected company (Fama, 1970).
Friedman and Singh (1989), find that stockholders react positively if prior firm performance is poor, and the succession was initiated by the Board or the CEO, and if the prior firm performance was good, the stock price reaction is negative. An unanticipated death of a CEO results in a reduction in company share price (Behn et al. 2006), as do delays in the announcement of a replacement of a CEO in the case of a CEO death.
This implies that the market places value on succession planning, as this would reduce uncertainty, and also implies that the role of CEO is perceived to add value.
Quigley et al. (2016), records that 25 percent of a firm’s overall profit can be placed on the value of the CEO. According to Anderson et al. (2015), in recent years, boards throughout the world have acknowledged the vital importance of long-term CEO succession planning. They have begun to adopt proactive and rigorous processes to secure the very best leadership for the business. But despite their progress in this area, many boards spend little, if any, time on planning their own succession and composition.
As the risk of heart disease, cancer and the untimely departure due to death or having a stroke continues to rise, how have you safeguarded yourself or the organisations key people from this untimely and at times catastrophic event. The risk of heart disease and having a stroke are preventable events when proper and timely preventative actions are established and followed.