Businesses support rehiring former CEOs as succession strategies face setbacks
The trend of "boomerang CEOs" - chief executives who return to lead a company after a prior tenure - has reached a 10-year high in the U.S. Boards are increasingly favoring experienced former leaders, valuing their deep organizational understanding, proven ability to navigate challenges, and demonstrated success in creating shareholder value.
The Benefits of Boomerang CEOs
Boomerang CEOs bring several advantages to the table. Their established knowledge and relationships, prior relationships with key stakeholders, and familiarity with company culture can accelerate decision-making and strategy execution. They are often reappointed during periods of disruption or transformation, leveraging their crisis and change leadership skills to navigate challenges effectively.
Because former CEOs often have demonstrated past success, their return may restore investor confidence. They are often incentivized with substantial compensation packages linked to performance and long-term equity to align with shareholder interests.
Potential Risks and Long-term Implications
However, the return of a former CEO is not without risks. Returning CEOs might revert to previous approaches that may no longer fit the evolving business environment, potentially slowing innovation or adaptation. Frequent reliance on boomerang CEOs can reflect weakness in developing new leadership talent internally or external candidate scouting, which may concern shareholders about future succession stability.
The return may also raise investor and employee expectations, pressuring the CEO to deliver quick results in a potentially changed context, which carries operational and reputational risks. If boomerang appointments reflect leadership stagnation or fail to adapt to market shifts, shareholders might face underperformance risks, strategic missteps, or declining competitiveness.
CEOs returning with high compensation packages tied to long-term incentives can better align interests with shareholders but also increase fixed costs during turnaround phases.
Case Study: UnitedHealth and Stephen Hemsley
The appointment of a boomerang CEO is not a last resort, but it's not the first choice either. For instance, UnitedHealth reappointed Stephen Hemsley as CEO to replace Andrew Witty. Hemsley was awarded $60mn in stock options. However, the reappointment of Hemsley sparked a shareholder rebellion over the company's pay policies.
Long-term Implications for Shareholders
Boomerang CEOs can stabilize companies by leveraging their institutional knowledge, leading to potentially improved operational efficiency, strategic consistency, and enhanced long-term profitability. However, if boomerang appointments reflect leadership stagnation or fail to adapt to market shifts, shareholders might face underperformance risks, strategic missteps, or declining competitiveness.
The increase in boomerang CEOs has raised concerns among investors about succession planning for the long term. Bob McCormick, executive director of the Council of Institutional Investors, has expressed concerns about the potential lack of succession planning for the long term.
Notable Boomerang CEOs
Boomerang CEOs are often high-profile individuals. As of the current year, 22 companies in the S&P 1500 are run by CEOs who have returned to their roles. Bob Iger is the CEO of Disney, having returned to the role in 2022. Steve Sanghi, who ran Microchip Technology for 30 years until 2021, has been appointed as the permanent CEO of the company. Michael Dell is the CEO of Dell Technologies, on a second stint in charge.
In summary, the rise of boomerang CEOs in the U.S. reflects boards' preference for seasoned leadership amid complexity. While they offer continuity and experience that can benefit shareholders, companies must weigh risks related to leadership renewal and evolving strategic challenges to safeguard long-term value. For a boomerang CEO on a transitional basis, the package should not incentivize them to stay longer. The sign-on package should be tied to clear performance measures to ensure the CEO's tenure is beneficial for the company and its shareholders in the long run.
- The deep organizational understanding, crisis management skills, and proven ability to create shareholder value that boomerang CEOs possess can lead to improved operational efficiency, strategic consistency, and enhanced long-term profitability for a business.
- Boomerang CEOs, such as Michael Dell of Dell Technologies, Steve Sanghi of Microchip Technology, and Bob Iger of Disney, are often high-profile individuals who have demonstrated success in their industries and return to lead companies after prior tenures.
- The rise in boomerang CEOs has raised concerns among investors about succession planning for the long term, as over-reliance on former CEOs may reflect weakness in developing new leadership talent internally or external candidate scouting, potentially affecting future succession stability and competitiveness.
