Location
Please select your investor type by clicking on a box:
We are unable to market if your country is not listed.
You may only access the public pages of our website.
The ideal scenario, in our view, is a smooth transition in leadership: a long-serving management team member leaves the office in a planned succession and is followed by an internal candidate who has been primed to take on the position. A Harvard Business School study on different types of CEO succession across 200 organisations over a 15-year period1 found that on average, insiders didn’t significantly change their company’s performance. This makes intuitive sense: similar people working in a similar way can produce similar results, thereby ensuring the continuity of business performance.
A planned succession strategy can ensure continuity of a company’s strategy, execution, and corporate culture. Moreover, it can promote internal advancement, recognition of talent and retention of intellectual capital within the firm. Having analysed management transitions within our portfolio, we found successful transitions often stemmed from advance planning and strong internal talent development. Creating a strong internal pool of diverse candidates can offer the board a selection of appropriate options to consider, looking beyond the most probable successors at that time to include high potential candidates who, when subject to proper training and career development opportunities, are well equipped with the skills to prepare them for the potential transition. We think this is particularly important when organisations are looking to improve management diversity over the long term.
One example of a well-planned and articulated succession strategy is that of a Peruvian bank owned in the portfolio. Following the retirement of the CEO, the board appointed an internal candidate who had been at the organisation for over 20 years, serving as the deputy CEO and head of the main subsidiary. Under the new leadership, we saw a seamless transition and continuation of the long-term business strategy and vision.
In another example, we saw a South African packaging company’s CFO assume the role of CEO. Given his deep understanding of the business, its relationship with stakeholders and financial levers for value creation, we also saw a smooth transition in leadership. Having engaged with the CEO on the reasons for the successful transition, he believed that purposefully identifying and developing talent internally is essential and that succession planning should start the moment a new CEO is appointed.
Sometimes, however, hiring an external candidate with strong experience and a proven track record can provide a new perspective to the business and can signal a change in strategic focus. According to a study by Spencer Stuart, when researchers looked at S&P500 CEOs who had led more than one company, they found that 70% generated better performance their first time around2. At the same time, however, many experienced CEOs also drove total shareholder return in the first few years by improving operational efficiency and profitability3. This was the case at a Taiwanese semiconductor manufacturer, which hired an executive of a leading global foundry business. Having developed a strong track record of execution, the CEO was able to use his experience to streamline the business and optimise processes, which led to a significant improvement in profitability.
Approximately 78% of our holdings have an internally promoted CEO versus 59% for the MSCI EM Index4. In most cases, these CEOs previously served as former executives or divisional heads. Additionally, we found the tenure of the CEO was higher than that of the index.
Founder or family operated companies can often be attractive investments – management think long term, are frugal in their investment decisions, have value-based cultures and strong balance sheets5, and can be more aligned with minorities. However, there comes a point in the lifecycle of the business when the family faces the inevitable decision on whether to professionalise the management team. A successful transition can maintain the family’s culture and distinctiveness and grow the business whilst integrating strong systems and organisational structures. In our view, a successful transition to professional management does not involve removing the family from its role in the business. Rather, it involves defining clear roles for the family and for professional managers, such that the family can still have an influence on the long-term strategic direction. As with general succession planning, a successful transition of family to professional management involves advance planning and the cultivation of a strong pool of internal candidates with a powerful understanding of the business and its culture.
After two generations of family leadership, we saw a successful transition to a professional management team at a Filipino conglomerate. Whilst the second generation remain involved as board members, the day-to-day operations are now handled by a professional CEO who has now served in his role for over six years, with prior experience as a leader in various businesses at the conglomerate.
Our experience also suggests that poor management succession planning can lead to a change in the company’s strategic priorities, cause poor capital allocation decisions, damage the company’s culture, and destroy shareholder value. Such implications can sometimes take years to materialise and can have a long-lasting impact on a business franchise. One example of a poor transition, in our opinion, was a South African media conglomerate. After the founder and major shareholder stepped down as CEO, he appointed an internal successor. Whilst we saw an improvement in corporate governance during his tenure, we felt the capital allocation was not as strong. As a result, the stock’s discount to NAV increased over the course of his leadership.
We believe that factors such as management succession planning are a crucial way of assessing how a business is positioned over the long term. Without planning for the right person at the top, even established companies with solid business models can struggle.
From an investment perspective, we integrate succession planning into our bottom-up investment research and checklist. In general, a large proportion of our portfolio companies have internally promoted management members, and we have noticed consistency in the way the businesses have operated following any management changes. That said, we will continue to regularly engage with our holdings to understand and ensure that the businesses we are invested in have credible succession plans in place.
1 The high cost of poor succession planning’, Harvard Business Review, May 2021.
2, 3 ‘Predicting CEO Success: When Potential Outperforms Experience’, Spencer Stuart, December 2020.
4 As at October 2023.
5 ‘What you can learn from family businesses’, Harvard Business Review, November 2012.
Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.
This document is a marketing communication and it may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (BBFM S.A.), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany, Italy, Spain and Netherlands the BBFM S.A is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by RBC Global Asset Management (UK) Limited (RBC GAM UK), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts at the registered office of the Swiss representative or at the registered office or place of residence of the investor shall have jurisdiction pertaining to claims in connection with the offering and/or advertising of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), the Packaged Retail and Insurance-based Investment Products - Key Information Documents (PRIIPs KID), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Asia, by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong. In Australia, RBC GAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. RBC GAM UK is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits RBC GAM UK to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. In the United States, by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. The entities noted above are collectively referred to as “RBC BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of RBC BlueBay by the respective licensing or registering authorities. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only, due to local regulatory and legal requirements.
This document is intended only for “Professional Clients” and “Eligible Counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) or the FCA); or in Switzerland for “Qualified Investors”, as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by “Accredited Investors” (as defined in the Securities Act of 1933) or “Qualified Purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer.
Unless otherwise stated, all data has been sourced by RBC BlueBay. To the best of RBC BlueBay’s knowledge and belief this document is true and accurate at the date hereof. RBC BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. RBC BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only.
No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of RBC BlueBay. Copyright 2023 © RBC BlueBay. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management Inc., RBC Global Asset Management (UK) Limited and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated corporate entities. ® / Registered trademark(s) of Royal Bank of Canada and BlueBay Asset Management (Services) Ltd. Used under licence. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. RBC Global Asset Management (UK) Limited, registered office 100 Bishopsgate, London EC2N 4AA, registered in England and Wales number 03647343. All rights reserved.
Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.