Trends in CEO transitions and implications for boards

2025 was a particularly active period for CEO transitions across North America. Among S&P 500 companies, the CEO succession rate climbed to approximately 13%, up from 10% in 2024.

While CEO transitions are a normal part of the corporate life cycle and can be driven by a number of voluntary and involuntary reasons (including activism), in what has been described as a "CEO gig economy," boards of directors are facing increased pressure to be proactive and transparent in their CEO performance management. In Canada alone, several high-profile S&P/TSX 60 issuers' CEO transitions have made headlines, underscoring that even the most established organizations are not immune to this trend of board accountability.

Navigating the inherent tension in the board and CEO relationship

Under corporate laws, directors are charged with managing or supervising the management of the corporation's business and affairs. A critical component (and arguably the most important aspect) of a board's duty is hiring, supervising and evaluating the CEO, along with CEO succession planning. Because of the CEO's outsized influence on a corporation's strategy, culture, and performance, a healthy board and CEO dynamic is essential. The board must strike a careful balance: provide counsel and support to the CEO, while also exercising independent oversight. As such, there is an inherent tension in the board and CEO relationship.

Open and honest communication is key to navigating and ensuring the effectiveness of this relationship. Among other things, there must be clear communication to the CEO (and also to the corporation's other stakeholders) on the CEO's performance objectives and how the CEO will be evaluated and compensated against such objectives. In short, there should be no surprises.

Benefits of CEO performance targets setting and evaluation

Consistent, evidence-based oversight of the CEO promotes accountability and positions the board to respond credibly to any shareholder concern. Key benefits include:

• Early identification of issues. Regular (e.g., quarterly) touchpoints and formal (e.g., at least annually) evaluations against performance objectives that align with the corporation's strategy provide an early warning system, surfacing potential problems and opportunities to course correct for both the CEO and the board before issues escalate.
• Informed compensation decisions. Evaluation outcomes provide a clear, evidence-based foundation for CEO pay decisions, especially in the context of performance-linked or "at risk" compensation linked to achieving corporation-wide and/or personal performance targets.
• Stakeholder accountability (and activism prevention). A well-designed CEO evaluation and compensation structure signals to current and prospective shareholders and other stakeholders (including potential activists) that the board is actively monitoring and assessing the CEO's performance, and ensuring meaningful alignment with the corporation's strategic plan and accountability to shareholders and other stakeholders.
• Enhanced board-CEO dialogue. The evaluation process - from setting expectations to evaluations and pay decisions - creates a framework for two-way dialogue between the board and the CEO about performance expectations, and how they compare to the actual results. Such constructive engagement can also help the CEO address and mitigate shortfalls.

Benefits of CEO succession planning

A well-considered and well-informed CEO succession planning process is part of the board's risk oversight responsibility and positions the board to respond credibly to any shareholder concerns or to an unplanned (or a planned but accelerated) CEO change. Key benefits include:

• Enhancing shareholder confidence. A well-defined CEO succession plan reassures shareholders, business partners, customers, employees and other stakeholders that the corporation is positioned for long-term success.
• Maintaining control and stability. Whether in the context of a planned transition or an unplanned (or a planned but accelerated) transition, succession planning enables the board to maintain control over the CEO change and related narrative, which in turn helps maintain organizational stability during the leadership transition.
• Supporting talent identification and development. Succession planning helps identify potential internal and external CEO candidates, and offers opportunities to develop internal talent, ensuring the corporation has a pipeline of potential CEO candidates.
• Mitigating risk (and activism prevention). Proactive succession planning helps to mitigate the risk of disrupted business operations and increased exposure to activist approaches during a leadership transition. In particular, in an unplanned CEO change, the board's ability to quickly appoint an interim CEO (especially someone with institutional and/or sector knowledge) can help quell shareholder concerns and sustain business operations, while allowing the board time to engage and onboard the suitable long-term candidate.

Practical implications for boards

As the trend of increased focus and pressure on boards to demonstrate proactive CEO performance management and succession planning is expected to continue, boards (particularly their independent directors) need to be proactive in their approaches to CEO performance targets setting, evaluation, compensation and executive continuity planning. This will help inform and prepare boards to engage meaningfully with and respond credibly to shareholders and other stakeholders about the CEO's performance.

Failure to do so could result in directors themselves being subject to scrutiny, criticism and calls for their removal, for failing to properly exercise their duties to supervise the management of the corporation's business and affairs.

The authors wish to thank Bilal Ak, articling student, for his help in preparing this legal update.