17th Annual CEO Succession Study. Australian boards leading the way on CEO succession

17th Annual CEO Succession Study Australian boards leading the way on CEO succession

Now more than ever, Australian companies are leading the way on planned CEO successions, relative to leading organisations globally. This leadership has translated into the lowest rate of unplanned departures in the 17 year history of this study. By end 2016, the most recent intake of Australian CEOs to leading ASX companies is unlike any globally. The latest new arrivals in leading Australian companies are more likely to be from outside their new organisation, have worked internationally, and have already served as a CEO. Although Australian boards are leading on planned successions, more attention is needed on Diversity. Based on the latest snapshot of those joining the top job in leading Australian organisations it takes being a CEO to get hired as a CEO, raising some interesting implications for aspiring leaders who are seeking to break into the CEO cohort, and for boards intent on increasing gender diversity from an already low diversity pool. 2 Strategy&

Executive summary Australia s leading companies continue to be under pressure to choose their next CEO wisely, as tough shareholder expectations, competitive forces and market regulations show no signs of softening in the local market. This year s analysis into CEO succession in the ASX 200 extends our longitudinal analysis which started in 2000, through to 2016. Through the study, we analyse succession and performance of leading Australian commercial organisations and compare this to leading listed global organisations. Based on most recent successions up to 2016 in Australia, we found that leadership changes are increasingly planned in fact, the rate of CEOs forced to leave their roles as a result of unplanned events reached a record 17-year low, accounting for only 13% of all turnover events documented last year, once turnovers due to merger were excluded. The overall rate of CEO turnovers, which includes both planned, unplanned and merger related successions observed in 2016, was lower in Australia than it has been since 2011, falling for the third consecutive year from 25.5% in 2013 to 16.5%. In 2016, the overall global CEO turnover rate was 14.9%, down from a 17 year high of 16.6% in 2015. However, when turnovers due to merger are removed, the global forced turnover rate in 2016 was 19%, markedly greater than the latest Australian level. Our findings also show that incoming CEOs in the ASX 200 are still predominantly male, as are CEOs around the world. Only one female CEO was appointed by an ASX 200 company last year, however Australia still exceeded the overall global average incoming female CEO fraction in 2016, painting a dim picture for increasing diversity in the top job. The profile of the typical incoming CEO of a major listed Australian company is noticeably different to the global average new CEO, with the Australian incoming leaders. more likely to have been born overseas, 43% in Australia compared with 5% globally having worked internationally before taking office for a leading organisation, 65% in Australia compared with 24% globally more likely to have come from a different organisation, 52% in Australia compared with 36% globally having worked as a CEO previously, 52% in Australia compared with 21% globally The most recent results indicate that leading Australian companies are increasingly more likely to look outside for a new CEO hire, with 52% of new CEO hires coming from outside of the organisation at ASX 200 companies in 2016. This is almost three times the global average (18% in 2016) and four times greater than US and Canada during the same period (13% in 2016). Strategy& 3

In the 17th year of our long run study into CEOs in leading Australian and global organisations, we have focussed on building a deeper understanding of the contemporary choices made by boards as they seek to position their organisations for success in an increasingly disrupted, competitive and adaptive marketplace. We also touch on the implications for important societal agendas, such as diversity, and highlight considerations for senior leaders intent on securing a CEO role in the Australian market. Finding 1 CEO turnover in leading Australian companies is at a 5-year low The long run CEO turnover trend is variable and spiked at 29% (2011) and been on the decline since. In 2016 the total turnover rate (including planned, forced and merger driven successions) dropped to 16.5%, well below the 2011 rate (Exhibit 1). Finding 1 CEO turnover in leading Australian companies is at a 5-year low Exhibit 1. Australian CEO turnover rate by succession reason CEO turnover events as a percentage of ASX 200 companies Turnover Rate 30 25.0% 29.0% 25.5% Total global turnover in 2016 was 14.9% 25 20 15 10 5 13.5% 13.0% 1 3.0% 3.0% 1.5% 3.5% 5.0% 8.0% 7.0% 5.5% 14.0% 2.0% 4.0% 8.0% 13.0% 3.5% 7.0% 15.5% 3.0% 10.0% 15.0% 4.0% 8.5% 20.5% 6.0% 12.0% 4.0% 10.0% 11.0% 17.5% 16.5% 5.0% 3.5% 11.5% 9.0% 11.5% 5.5% 12.0% 21.0% 6.0% 1 5.5% 17.5% 21.0% 3.5% 4.0% 13.5% 19.5% 3.0% 14.0% 16.5% 5.0% 1.5% 10.0% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 M&A Forced turnover Planned turnover Note 1: Exhibit excludes turnover events with incomplete information, but includes interim CEOs. Note 2: Corrections were made to some historic data points in 2016 due to additional information being made available. Source: Strategy& 2016 Australian CEO Succession study 4 Strategy&

Finding 2 Leading Australian companies are planning succession more The good news is that when boards opt for change in the top job, the process is increasingly planned in Australia (Exhibit 2). The rate of unplanned or forced turnovers has dropped to its lowest level in 17 years and in 2016 was 13% markedly different to 48% less than 10 years previously. This is positive for shareholders because planning helps to defend shareholder value the average cost of an unplanned succession event in Australia can be as much as $2 billion in forgone shareholder value per company. Finding 2 Leading Australian companies are planning succession more Exhibit 2. Australian CEO succession reasons as a percentage of turnover events 2000-16 100 19 21 21 24 19 26 25 29 42 25 28 35 30 46 35 33 23 90 80 16% 48% 33% 33% 26% 23% 32% 17% 48% 28% 18% 31% 17% 24% 23% 15% 13% 70 60 50 40 30 84% 52% 67% 67% 74% 77% 68% 83% 52% 72% 82% 89% 83% 76% 77% 85% 87% 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Forced turnover Planned turnover Note: Exhibit excludes turnover events resulting from M&A and with incomplete information, but includes interim CEOs. Source: Strategy& 2016 Australian CEO Succession study Strategy& 5

Finding 3 Australia joins leading global organisations that are failing at Diversity Our study highlights that the fraction of female appointments to the CEO role in leading Australian organisations continues to lag markedly behind their male counterparts. Proportionally, the incoming cohort in 2016 included a greater percentage of female CEOs than the global average for top listed organisations. However in real terms, this amounted to only 1 new female CEO hire in 2016, out of a cohort of 23 new appointments. Although the Australian longer run average proportion has tended to be greater than the global proportion of new female CEOs, the maximum intake fraction in Australia has never exceeded 10% (9.1% in 2015), nor reached more than about 5% globally (5.2% in 2014) illustrated in Exhibit 3. Finding 3 Australia joins leading global organisations that are failing at Diversity Exhibit 3. Australian and global share of incoming women CEOs 2007-16 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.0% 1.5% 1.0% 0.5% 6.9% 4.8% 4.0% 3.5% 3.7% 2.9% 2.6% 1.1% 1.0% 0.0% 9.1% 8.6% 6.7% 5.2% 4.3% 4.3% 3.6% 3.0% 2.8% 2.2% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Australia Global Note: Exhibit includes interim CEOs, but excludes turnover events resulting from M&A and with incomplete information. Source: Strategy& 2016 Australian CEO Succession study, Strategy& 2016 CEO Success study 6 Strategy&

Finding 4 Incoming Australian CEOs are more likely to be outsiders The most recent results indicate that leading Australia companies are increasingly likely to look externally for a new CEO, with 52% of new CEO hires coming from outside the organisation in 2016. This is almost three times the global average (18% in 2016) and four times greater than US and Canada during the same period (Exhibit 4). The comparative increased preference for outsider CEOs between leading Australian and global organisations is not just a recent phenomenon, but rather a trend that has been observed since 2012. Finding 4 Incoming Australian CEOs are more likely to be outsiders Exhibit 4. Share of incoming company outsider CEOs by region 2012-16 52% 36% 35% 36% 32% 29% 29% 28% 23% 18% 18% 22% 21% 16% 17% 13% 4% 3% Australia Global Other Mature 1 Brazil, Russia, India China Other Emerging 2 Western Europe U.S/Canada Japan 2012-2016 2016 1. Other Mature economies include Argentina, Australia, Bahrain, Chile, Czech Republic, Hong Kong, Hungary, New Zealand, Poland, and Korea. 2. Other Emerging economies include Egypt, Kazakhstan, Mexico, Nigeria, South Africa, Turkey, and Vietnam. Note 1: Mature countries are defined as per the U.N. Development Programme 2015 ranking of countries with very high human development (human development index >0.80); all others are emerging countries. Note 2: Exhibit excludes interim CEOs (except for Australia which includes interim CEOs) and turnover events resulting from M&A; Exhibit for Australia excludes turnover events with incomplete information. Source: Strategy& 2016 CEO Success study, Strategy& 2016 Australian CEO Succession study Strategy& 7

Finding 5 Erratic Outsider CEO performance continues Whilst boards are purposefully selecting outsider leaders for the top job, the long run performance of outsider CEOs remains highly variable in leading Australian organisations (Exhibit 5). In the past 8 years, outsider CEOs have pivoted from decreases in total shareholder returns (TSR) of 14% (2013) to increases of 11% (2016), whilst their insider peers have delivered more stable returns between TSR decreases of 4% to increases of 5%. The erratic results have been examined in previous studies, where we explored the possibility that incoming insider CEOs have a better appreciation of their company s business culture, helping them to drive more consistent TSR outcomes. Finding 5 Erratic Outsider CEO performance continues Exhibit 5. TSR delivered by outsider CEOs continued it s volatile trend, spiking to 11% in 2016, while insider value decreased slightly compared to 2015 Median total shareholder returns 1 by outgoing Australian CEO pedigree 2009-16 Regionally adjusted annualized TSR 15% 11% 10% 5% 4% 6% 5% 5% 4% 0% 0% -1% 2009-4% 2010 2011 2012-3% -5% -7% 2013 2014 2015 2016-1% -4% -3% -10% -15% -13% -14% Insider Outsider 1. Total shareholder returns are annualized over outgoing CEOs tenure and are regionally adjusted, meaning that performance is measured relative to a regional index (S&P 500, Brazil Bovesoa, FTSE 100, CAC 40, among others globally). Note: Exhibit includes turnover events resulting from M&A and interim CEOs, but excludes turnovers and with incomplete information. Source: Strategy& 2016 Australian CEO Succession study 8 Strategy&

Finding 6 Australia s incoming CEOs are eight times more likely to have been born outside of Australia than the global average Leading Australian companies hire significantly greater proportions of non- Australian CEOs than any other region globally, 43% in Australia compared to the global average of 5% in 2016 (Exhibit 6). This finding may indicate that boards have recognised the need to engage external talent to help increase the ability to drive increasingly globalised agendas. Finding 6 Australia s incoming CEOs are eight times more likely to have been born outside of Australia than the global average Exhibit 6. Incoming CEO nationality by region 2016 100 90 23 9% 287 5% 8% 54 33 17 6% 75 3% 7% 35 9% 3% 56 5% 17 80 27% 35% 70 43% 60 6% 50 40 87% 94% 91% 89% 30 20 48% 68% 59% 10 0 Australia Global China Japan Brazil, Russia, India U.S/Canada Other Mature 1 Western Europe Other Emerging 2 Unknown Different country, different region Different country, same region Same country 1) Other Mature economies include Argentina, Australia, Bahrain, Chile, Czech Republic, Hong Kong, Hungary, New Zealand, Poland, and Korea. 2) Other Emerging economies include Egypt, Kazakhstan, Mexico, Nigeria, South Africa, Turkey, and Vietnam. Note 1: Mature countries are defined as per the U.N. Development Programme 2015 ranking of countries with very high human development (human development index >0.80); all others are emerging countries. Note 2: Exhibit excludes interim CEOs (except for Australia which includes interim CEOs) and turnover events resulting from M&A; Exhibit for Australia excludes turnover events with incomplete information. Source: Strategy& 2016 CEO Success study, Strategy& 2016 Australian CEO Succession study Strategy& 9

Finding 7 Incoming Australian CEOs have more international experience than CEO s globally. In 2016 leading Australian boards appointed a group of CEOs with more than twice the proportion of international experience than the global average CEO (Exhibit 7). The average Australian incoming CEO is almost ten times more likely to have worked internationally before becoming a CEO than their counterpart in China, and more than four times more likely than their US and Canadian peers. Allied to the drive for appointing CEOs born outside of Australia, increased global experience in the incoming CEO cohort reinforces the observation that Australian boards have recognised the need to engage talent with a wide experience base to help increase their company s success in an increasingly globalised marketplace. Finding 7 Incoming Australian CEOs have more international experience than CEO s globally Exhibit 7. Incoming CEOs with experience in different regions 1 compared with company HQ region 2016 100 23 287 55 17 35 19 75 32 54 90 80 35% 70 60 50 76% 53% 59% 66% 74% 85% 88% 93% 40 30 65% 20 47% 41% 10 0 24% Australia Global Western Europe Brazil, Russia, India 34% 26% 15% 13% 7% Other Mature 2 Other Emerging 3 U.S/Canada Japan China Has not worked in other regions Has worked in other regions 1. Experience in different regions means incoming CEOs have experience in regions other than company HQ region. 2. Other Mature economies include Argentina, Australia, Bahrain, Chile, Czech Republic, Hong Kong, Hungary, New Zealand, Poland, and Korea. 3. Other Emerging economies include Egypt, Kazakhstan, Mexico, Nigeria, South Africa, Turkey, and Vietnam. Note 1: Mature countries are defined as per the U.N. Development Programme 2015 ranking of countries with very high human development (human development index >0.80); all others are emerging countries. Note 2: Exhibit excludes interim CEOs (except for Australia which includes interim CEOs) and turnover events resulting from M&A; Exhibit for Australia excludes turnover events with incomplete information. Source: Strategy& 2016 CEO Success study, Strategy& 2016 Australian CEO Succession study 10 Strategy&

Finding 8 Incoming Australian CEOs are likely to have been a CEO previously In 2016 leading Australian companies appointed a cohort of top leaders of which 1 in 2 had formerly held a CEO appointment (Exhibit 8). Globally the average was 1 in 5 during the same period, and as low as 1 in 10 in Japan. The increased preference exhibited by Australian boards for the appointment of senior executives with a proven track record in the CEO role may highlight a more conservative strategy on how to succeed in the market, compared to the typical approach taken by boards globally. Finding 8 Incoming Australian CEOs are likely to have been a CEO previously Exhibit 8. Incoming CEOs with previous public company CEO experience by region 2016 23 290 54 56 35 19 76 17 33 48% 79% 72% 73% 74% 79% 82% 88% 91% +24% 52% 21% 28% 27% 26% 21% 18% 12% 9% Australia Global China Western Europe Other Mature 1 Other Emerging 2 U.S/Canada Brazil, Russia, India Japan No CEO experience Prior CEO experience 1. Other Mature economies include Argentina, Australia, Bahrain, Chile, Czech Republic, Hong Kong, Hungary, New Zealand, Poland, and Korea. 2. Other Emerging economies include Egypt, Kazakhstan, Mexico, Nigeria, South Africa, Turkey, and Vietnam. Note 1: Mature countries are defined as per the U.N. Development Programme 2015 ranking of countries with very high human development (human development index >0.80); all others are emerging countries. Note 2: Exhibit excludes interim CEOs (except for Australia which includes interim CEOs) and turnover events resulting from M&A; Exhibit for Australia excludes turnover events with incomplete information. Source: Strategy& 2016 CEO Success study, Strategy& 2016 Australian CEO Succession study Strategy& 11

Top Suggestions: for Boards, Shareholders, Current and Aspiring CEOs Suggestion 1 Suggestion 2 Get Diversity back on the agenda (Boards) Compared to other leading global organisations, Australian boards are seeking to better position for an increasingly globalised and connected marketplace by targeting CEOs born outside of Australia, with global career expertise. However, the same forward looking strategy has not been applied to the Diversity agenda, which is reflected in a decreasing incoming CEO female cohort and a propensity to appoint leaders who have already held the position of CEO. Do your homework on CEO origins before investing (Shareholders) Outsider CEOs produce erratic total shareholder returns, relative to their insider counterparts in the Australian marketplace. In 2016 outsider CEOs delivered almost a three times greater (11%) average shareholder return than insider CEOs (4%). However in 2013 outsider CEOs decreased total shareholder return (-14%) ten times more than insiders (-1%). To ensure longer term success, Australian boards should establish hiring policies which proactively seek out talented female CEO contenders, ensuring that leading Australian companies don t just limit the pool to 50% of the available population. To increase return on investment, shareholders are encouraged to include CEO origin (insider versus outsider) in their evaluation of likely return on investment, and factor this variable into their portfolio management strategy. 12 Strategy&

Suggestion 3 Suggestion 4 Invest in learning the culture (Current CEOs) In previous studies, we have highlighted that incoming CEOs are more likely to be successful if they can reduce the learning lag associated with orientating to a new organisation. We suggested that new CEOs should seek to build strong relationships internally as soon as possible, and in particular establish a mentoring relationship with a former successful CEO from the same organisation. We highlighted that this would help the outsider to more quickly understand how to maximise impact and deliver improved TSR. This year we extend on this advice, to suggest that incoming CEOs will benefit from paying close attention to organisational culture and quickly applying insights in a practical way to help reinforce organisational strategy making. Dust off the passport and work abroad before taking the top job (Aspiring CEOs) This year s results show that leading Australian companies are increasingly targeting senior leaders with international experience for the top job. In fact, in 2016 incoming CEOs in Australia were at least twice as likely to have international experience than the global average incoming CEO. We suggest that incoming CEOs are more likely to deliver improved and more consistent TSR if they quickly pay attention to ways the organisation interacts, how leaders and teams engage together to align to agendas, what behaviours are seen during episodes of conflict, and how issues are resolved. To increase the likelihood of successfully securing a CEO role in a leading Australian firm, aspiring CEOs are encouraged to seek out international opportunities, before positioning for the top job in Australia. 13 Strategy&

Methodology Global study The CEO Succession Study identified the world s 2,500 largest public companies, defined by their market capitalisation (from Bloomberg) on 1 January 2016. We then identified companies among the top 2,500 that had experienced a CEO succession event between 1 January 2016 and 31 December 2016, and cross-checked data using a wide variety of printed and electronic sources in many languages. For a listing of companies that had been acquired or merged in 2016, we also used Bloomberg. We investigated each company that appeared to have changed its CEO in 2016 to confirm that a change occurred, and additional details title, tenure, chairmanship, nationality, professional experience and so on were sought about both the outgoing and incoming chief executives (as well as any interim CEOs). Company-provided information was acceptable for most data elements except the reason for the succession. Outside press reports and other independent sources were used to confirm the reason for an executive s departure. Finally, Strategy& consultants worldwide separately validated each succession event as part of the effort to learn the reason for specific CEO changes in their region. To distinguish between mature and emerging economies, Strategy& followed the United Nations Development Programme 2015 ranking. Total shareholder return data over a CEO s tenure was sourced from Bloomberg and includes reinvestment of dividends (if any). Total shareholder return data was then regionally market-adjusted (measured as the difference between the company s return and the return of the main regional index over the same time period) and annualised. Strategy& Australian study The Australian-specific component of the global study identified all companies listed in the ASX 200 since 2000, a dataset spanning 617 succession events. We used annual reports and press searches to learn if and when a CEO turnover event had taken place for all these companies since 2000, identifying every company s CEO for each fiscal year, confirming the turnover event and determining the reason. Bloomberg and Thomson Eikon helped us identify announcements relating to the retirement or appointment of CEOs, as well as presidents and managing directors, for the ASX 200 companies. Total shareholder return data for a CEOs tenure was sourced from Capital IQ in 2016 and includes reinvestment of dividends (if any). Each company that experienced a CEO change was analysed to confirm that the change had occurred, and to confirm the name of the outgoing executive, the name of the incoming CEO (and whether they were an insider or outsider to the organisation) and the true reason for the turnover event. Consistent with the global study, three reasons were identified for a CEO transition event in Australia: regular transitions, which included planned retirements, CEOs accepting a position elsewhere, health-related departures or deaths in office merger-based transitions, in which a CEO s job was eliminated after an acquisition performance-related transitions, which included any departure initiated by the board that the media attributed to poor financial or managerial performance, or circumstances where the company was clearly underperforming but the departure was described as being for personal reasons. Gender-and age-based data for ASX 200 companies in 2016 is based on analysis of CEO data from Bloomberg BusinessWeek, 4traders.com and Thomson Eikon. 14

About the authors Varya Davidson Is a leader in the people and organisation strategy practice in Australia, Southeast Asia, and New Zealand for Strategy&, PwC s strategy consulting business. She is a partner with PwC Australia. Based in Sydney, she specialises in complex, time sensitive and often industrially challenged strategic transformations with a focus on the people and organisation dynamics, including using culture to accelerate organisational outcomes. varya.davidson@strategyand.pwc.com Julian Ballard Is a senior leader in the people and organisation strategy practice at Strategy&. He is based in Canberra, where he is a director with PwC Australia. He specialises in operating model redesign, strategic transformation, leadership performance improvement and culture-led transformation. julian.ballard@strategyand.pwc.com Nihar Khanna Is a senior associate with PwC Strategy&, based in the Sydney Office. He works in the people and organisation strategy practice, where he focuses on operating model redesign, transformation and change strategy. nihar.khanna@strategyand.pwc.com 15 Strategy&

Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex, high-stakes and often game-changing undertakings. We bring 100 years of strategy consulting experience and the unrivalled industry and functional capabilities of the PwC network to the task. Whether you re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we ll help you create the value you re looking for with speed, confidence and impact. We are part of the PwC network of firms in 157 countries with more than 223,000 people committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com. www.strategyand.pwc.com 2017 PricewaterhouseCoopers Consulting (Australia) Pty Limited. All rights reserved. PwC refers to PricewaterhouseCoopers Consulting (Australia) Pty Limited, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/ structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Liability limited by a scheme approved under Professional Standards Legislation. Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. We are part of the PwC network of firms in 157 countries with more than 223,000 people committed to delivering quality in assurance, tax, and advisory services. 127056338