01/05/2012 04:46 pm ET Updated Mar 06, 2012

New Year, New CEOs: Breaking the News Is Neither the Beginning Nor the End

The New Year often brings with it orderly change in CEOs for many companies. How successful these individuals will be -- and how a company's market cap fares during the transition -- depends in large part on the boards of directors' active involvement and well-planned communications.

2012 begins with significant leadership changes at companies including IBM, where Ginni Rometty just became the company's first female CEO, and Avon, where Andrea Jung takes an executive chairman post as the company searches for its new leader. Both transitions, while very different, underscore the importance of well-planned communications -- factored long before a transition takes place -- in setting a company, its board and new CEO on course for success.

Effective communications around a CEO transition can have a direct effect on a company's bottom line. New research from Oxford Metrica (disclosure: an Edelman partner) reveals that the difference between poor and effective communications in the first 10 days after a transition can swing market cap, on average, by 10 percentage points (+5 percent to -5 percent). Really poor communications can wield an even more detrimental effect. In the study, the difference between the best and worst communicated CEO transitions resulted in a 25 percent difference in market cap.

One example of good communication around a CEO transition is IBM. Back in October, IBM's board announced that CEO Samuel Palmisano would hand the reins to Rometty at the turn of the year, and outlined a clear rationale for the board's choice that imbued stakeholder confidence. It helped that internally Rometty is a well-known, long-time IBM executive who is credited with helping lead IBM's evolution into the services business. Media coverage of the leadership transition was by and large positive, and IBM ended 2011 as one of the year's best performing stocks. Clear, well executed communication around leadership change made the transition appear seamless.

In contrast, consider the communication from Avon, which followed a well-trodden path of more poorly communicated CEO transitions, revealing potential infighting and inviting skepticism from numerous quarters, both internal and public. A Wall Street Journal article reported that outgoing CEO Jung said in an internal memo that she's "not going anywhere" and will continue "defining strategy and brand positioning." Not helping matters was the revelation that two former CEOs criticized in letters to the board, the decision to allow Jung to stay on, preferring instead a "clean break." However one later recanted this statement after learning the letter went public.

Communicating a board's most important decision

While often fraught with communications challenges, CEO transitions should be considered a natural part of a company's life cycle and an important opportunity to build stakeholder trust. But in today's complex business environment, CEOs and boards are under more pressure to defend their choice in leader. Critical factors to navigating today's environment include:
  • Faster news flows and the rise of social media demand fast answers from boards
  • Boards are required to use all channels in order to speak to all stakeholders because people consume information from multiple sources to make decisions.
  • Boards are forced to be more transparent and comply with increasing regulation, including SEC rules, Sarbanes-Oxley and Dodd-Frank.
  • The recent economic crisis has demonstrated the uncertain future of the global economic environment, increasing the need for a strong CEO-elect.

In this environment, successful communication requires careful planning that starts months before the actual announcement. In the case of an orderly transition, the communications process can be straightforward: it requires communicating an expected reason behind the change, the attributes that led the board to its decision on the successor, and a clear transition timeline. Consider both the news from Disney of Bob Iger's retirement slated for 2015 and management around the presumed retirement of JP Morgan Chase's Jamie Dimon in the next few years.

By contrast, more immediate transitions require a combination of careful preparation and planning by the board, dynamic communications and swift action to mitigate the company's reputational risk.

But unplanned CEO transitions can still be an opportunity to earn trust -- provided the board clearly communicates why the change is occurring and a clear path forward. In the Oxford Metrica study, there was very little market cap difference between orderly transitions with effective communications (e.g., Apple upon Steve Jobs' retirement) and immediate transitions with effective communications (e.g., Starbucks in 2008).

Business consultant Ram Charan said, "Let there be no doubt that the selection of a CEO is the most crucial job of a board." In today's complex world, I would argue that communicating the board's rationale for its CEO-elect is an equally critical responsibility. Clear, well-planned communications not only sets individual leaders up for success, but also may have a material effect for the company both in the year ahead and for the tenure of the CEO.