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Monday, February 12, 2018

Canada's largest companies are increasingly hiring outside candidates to fill their chief executive officer roles, especially when the firms are facing financial problems.

A new study by executive search firm Spencer Stuart shows external hires accounted for 34 per cent of new CEO selections at 100 of Canada's largest companies between 2007 and 2017, an increase from 20 per cent in the prior decade.

The proportion of external hires was even greater when the company was facing financial trouble.

Spencer Stuart said financially challenged companies that faced "significant declines in performance" - based on financial performance and share price - hired outside CEO candidates in 58 per cent of cases over the past decade.

While internal candidates are often still favoured because of their deep knowledge of the company, John Koopman, Spencer Stuart's Toronto office manager, said the growth in external hires may be the result of increasingly professional CEO succession practices that have been put in place by many boards over the past decade.

More thorough succession planning leads companies to look at more external candidates for comparison, he said, which brings new names forward for consideration.

"We're finding that in a good succession process, boards are looking at what's the best available outside the company and comparing that to what's available internally," he said.

In the United States, companies moved in the opposite direction over the same time frame, becoming far less likely to hire externally. Spencer Stuart said external CEOs accounted for just 12 per cent of CEO hires at companies in the S&P 500 index between 2007 and 2017, a decline from 41 per cent in the decade earlier.

The proportion of external hires rose to 24 per cent at financially troubled U.S. companies, well below the comparable 58per-cent level in Canada.

Mr. Koopman said many S&P 500 companies are larger than Canadian companies, and may find it easier to groom a bigger slate of internal CEO succession candidates.

"At the scale of most Canadian companies, it's not realistic often to develop two or three legitimate succession candidates," he said.

Canada's largest banks are as big as many of their U.S. counterparts, and appointed internal CEO candidates in all cases over the past decade, which may support the theory that larger companies can more easily develop successors for internal promotion, Mr. Koopman said.

Different governance practices in Canada, he said, may also play a role in the greater proportion of Canadian companies turning to external hires in bad times. Canadian companies are more likely to have independent board chairs who are not members of management, with 87 per cent of the 100 companies studied separating the roles. The separation trend has been accelerating in the United States in recent years, but about 50 per cent of S&P 500 companies still combine the positions.

Mr. Koopman said an independent chair may be more willing to look for new blood when the current management team has underperformed, while a chair who is also CEO may be more inclined to advocate for a member of the existing management team.

"A strong, independent chair who has the ability and willingness to drive decision-making may look broader than is typically the case otherwise," Mr. Koopman said.

The growing preference for external hires also means a greater proportion of CEOs are coming from outside Canada. Foreign hires - primarily U.S. candidates - accounted for 32 per cent of new CEO picks over the past five years, up from 21 per cent in the prior five years, the study said.

The list of foreign-born CEOs hired at Canadian companies during the past decade includes British-born Guy Laurence, who led Rogers Communications Inc. from 2013 to 2016, as well as the late Hunter Harrison, an American who headed Canadian Pacific Railway Ltd. from 2012 to 2017.

The proportion of female CEOs in Canada was little changed over the past decade, with four women heading top 100 companies in 2017, up from two in 2006. Women headed 5.6 per cent of S&P 500 companies in the United States in 2017. On boards, however, women filled 27 per cent of all board seats in 2017 at the 100 companies studied, up from 25 per cent in 2016 and 17 per cent in 2012, according to Spencer Stuart's annual board review.

There were eight women serving as board chairs, vice-chairs or lead directors in 2017 at the 100 companies studied, a number unchanged from 2014 and slightly down from nine in 2011. But the review shows the number of women who headed board committees - such as audit or compensation committees - climbed to 87 in 2017 from 36 in 2011.

Andrew MacDougall, Spencer Stuart's Canadian board practice leader, said experience as committee chairs may pave the way for more women to move into board-chair roles in the future.

"For sure you want to see some committee leadership experience on the part of your next board chair," Mr. MacDougall said. "You don't reach down hardly ever for someone who has just been a committee member and has not shown her ability to effectively chair a committee."

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