As uncertainty looms, Canadian CEOs head for the exits

Open this photo in gallery:

It took a while, but the Great Resignation has come to the C-suite, with some of the biggest household names in corporate Canada calling it quits.

There’s been a whirlwind of change in the corner offices of some of Canada’s largest companies in recent months, including high-profile departures such as Alex Pourbaix, who retired as chief executive officer of Cenovus Energy Inc. CVE-T, the exit of Jose Cil from Restaurant Brands International Inc. QSR-T and Galen Weston at Loblaw Cos. Ltd. L-T, who’s decided to let someone else be the political punching bag over high food prices for a change.

All told, this has been the busiest start to a year for turnovers at S&P/TSX Composite Index companies in at least a decade, an analysis of CEO transition announcements shows. Between January and April, 10 index-listed companies with a combined market capitalization of nearly $200-billion said their CEOs would be leaving, roughly double the number during the same period in the previous two years, and edging out the previous high of eight in 2020.

While CEO transitions can reinvigorate a company’s employees and provide an opportunity for a strategic rethink, they also present great risk. After all, studies suggest as many as 40 per cent of new CEOs fail in the first 18 months in office, which can pummel a company’s shares. So, as the most significant senior management handover in years unfolds, boardroom succession plans for chief executives are being put to the test.

The busy start to this year comes on top of a hectic second half of 2022, when Onex Corp.’s ONEX-T Gerry Schwartz announced his retirement after 40 years at the helm, Brian Porter departed from Bank of Nova Scotia BNS-T – triggering, in turn, change at Finning International Inc. FTT-T when that company’s CEO, Scott Thomson, moved to the bank – and Al Monaco left Enbridge Inc. ENB-T.

In fact, according to firms whose business it is to help other businesses find bosses, the pace of executive change across companies and organizations of all sizes is eerily reminiscent of the Great Recession.

“From what I’m seeing out there and hearing from companies, we probably haven’t seen this amount of CEO transition since at least 2008,” said Kelly Blair, a managing partner with executive search firm Caldwell Partners. “That was recessionary. This is something different.”

Pinning down exactly why CEOs leave companies can often be a guessing game, since the boilerplate language used in most CEO departure announcements – that he or she has expressed their “intention to retire,” or is “leaving to pursue other opportunities” – reveals little about the dynamic between board members and CEOs.

Even so, a picture is emerging. The shock waves from the COVID-19 pandemic, which caused business leaders and corporate boards to hunker down, have largely subsided. That’s provided companies with breathing room to think about succession planning again – and to examine whether their CEO is still the right person for the job.

At the same time, companies and their CEOs are faced with mounting uncertainty about an economic slowdown even as they continue to grapple with high interest rates, relentless technological disruption, workplace battles with employees and the shifting world of environmental, social and governance issues. That’s all bringing heightened scrutiny from a more assertive and outspoken shareholder base.

“A lot more boards are asking whether they have the right skills at the table given what their businesses are facing,” said Elaine Roper, a partner with executive search firm Odgers Berndtson, who added that the non-profit sector is also seeing “a huge change of CEOs” at the moment.

While the first year of the pandemic saw a burst of CEO departures, at least some of the current exodus is due to retirement plans that were put on hold over the past couple of years. Faced with a health crisis, disruptions to supply chains and workplace routines, followed by a surge in mergers and acquisitions and corporate deal-making activity, it was only natural for boards to ask CEOs who might have been on the way out to stay and guide their companies through the turbulence.

“People look for stability, and CEOs already had enough on their plate handling the business, so making a change didn’t make sense,” said Heidi Reinhart, a capital markets lawyer and partner with Norton Rose Fulbright. “We’ve come out of that into a period of normalcy.”

The intense demands of the past few years have also taken their toll on the mental health of executives, just as it has on workers in general, making this moment of relative calm an opportunity for some CEOs to step aside. “Everyone is burned out,” said Barry Schwartz, chief investment officer at Baskin Wealth Management.

There had been clear signs this was coming. Last summer Deloitte and research firm Workplace Intelligence released the results of a survey which found that nearly 70 per cent of C-level executives at companies in the United States, the United Kingdom, Canada and Australia were seriously considering quitting their jobs to improve their personal well-being.

Indeed, executive succession is on the radar worldwide, and not just because of the popularity of HBO’s art-imitates-life-imitates-art series Succession.

The first quarter saw the highest number of CEOs leave U.S. companies since the start of 2020, according to the latest CEO turnover report from executive coaching firm Challenger, Gray & Christmas. March, in particular, had the most departures for that month since 2002, when Challenger first began tracking CEO exits.

For Jay Forbes, the outgoing CEO of Toronto-based Element Fleet Management Corp. EFN-T, the world’s largest automotive management company, the proverbial stars aligned for him to begin preparations for his retirement in early 2022.

As a turnaround expert, his stints as CEO at four earlier companies had taken him to New Brunswick, Belgium, Ontario and then Manitoba. In 2018, he returned to Ontario to take the helm at Element at a time when the company had fallen deeply out of favour with investors. Since then, the company’s shares have risen more than 260 per cent.

At 62, Mr. Forbes already knew Element would be his last leadership role. “It would mark the capstone of my career, so that was a big personal consideration,” he said, noting that a number of retiring CEOs are around his age. “People like myself are maybe retiring a little earlier than some of our predecessors might have.”

What mattered, though, was the timing, ensuring that the changes he’d put in place to create strong organic growth were sustainable – and that his successor would fit the company’s collaborative culture. After roughly a year-long search, Element announced Laura Dottori-Attanasio, a former CIBC CM-T senior executive who Mr. Forbes describes as “a needle in the haystack,” will take over as CEO at the company’s annual meeting on May 10 after a three-month “orientation” period in which she worked as president alongside Mr. Forbes.

Would Mr. Forbes have retired earlier were it not for COVID-19? Potentially, he admits, since the pandemic likely delayed the pace of organic growth he wanted to see before leaving, but it “wouldn’t have been a material difference. We needed to ensure the changes that we made had been cemented in place and would withstand the test of future challenges.”

Like Element, Cenovus had a successor ready to step into the CEO position when the company announced Mr. Pourbaix would leave at the end of April to dedicate more time to advancing the oil sands industry’s decarbonization efforts. Chief operating officer Jon McKenzie was named CEO, and Mr. Pourbaix is staying on as executive chair.

“While I could have stayed on in the role for another year or two, Cenovus is in really great shape,” Mr. Pourbaix said on a call with analysts. “A thoughtful and measured succession plan is a hallmark of a well-managed company.”

Yet time and again, successions go awry, or at least deviate from the script expected by investors. Scotiabank’s decision last fall to bypass internal contenders to hire Finning’s Mr. Thomson, one of the bank’s directors, stunned investors.

The corporate landscape is also littered with so-called boomerang CEOs – former bosses who come back to replace their successors – the most high-profile of late being Walt Disney Co.’s DIS-N Bob Iger, who ousted his successor, Bob Chapek, after just two years.

Waste Connections Inc. WCN-T, another S&P/TSX Composite Index company that recently announced a CEO change, has likewise tapped a familiar face, rehiring Ronald Mittelstaedt, its founder, executive chairman and former CEO, to run the company less than four years after he left the job.

And, of course, outgoing Loblaw head Mr. Weston himself boomeranged back to the company the last time it went outside the family for leadership, as it has again done by tapping European retail executive Per Bank to replace him.

The problem, says Richard Leblanc, a governance professor at York University, is that fewer than one in three companies has an emergency succession plan, in the event a CEO quits, falls ill or is fired, and only slightly more have a permanent, long-term plan. That matters, because empirical evidence shows that CEOs tapped from inside a company tend to outperform those parachuted in from outside.

“Just because turnover is increasing doesn’t necessarily mean boards are doing a better job,” said Prof. Leblanc, adding that a good succession plan should ensure two or three internal candidates have been groomed for the top job and can step up if needed.

“The board’s number one job is to be prepared for a possible succession and it should start day one when a new CEO hits the ground,” he said.

There are reasons to believe the pace of CEO turnover could quicken as the year progresses.

For one thing, some of Canada’s largest banks have reshuffled their senior ranks lately, sparking speculation that change may be afoot. After all, four of the Big Five banks last announced leadership changes between April and December of 2013, and the average tenure of the previous two generations of bank CEOs was just over nine years.

As the pandemic has eased, corporate boards have also taken a greater interest in ensuring companies are on track with their strategic plans, said Ms. Roper, at Odgers Berndtson. Whereas strategic reviews might have once been conducted once or twice a year, that’s now happening at every boardroom meeting as directors seek to stay ahead of swirling geopolitical, economic and market uncertainty.

Add in the rising number of proxy battles and pressure campaigns launched against Canadian companies by activist investors over the past year, with many targeting change at the boardroom level, and boards are less forgiving of management missteps than they were in the past.

“Being a CEO is a high-risk profession at the best of times but now boards are reviewing the performance of CEOs on a much more regular basis than before the pandemic,” she said. “The bar is being raised for CEOs.”

The prospect of a recession could also be prompting some soul-searching on the part of existing CEOs who might see now as an opportune time to call it quits.

“You expect high CEO turnover during a recession, so what’s surprising is to see this level of change when so many companies are doing well,” Ms. Blair said. “Fears about an impending recession and pressure on stock prices is prompting some leaders to step down to get ahead of the risk to their own reputations and track records.”