SWFs Managing Executive Succession

Ashby Monk 

Executive turnover and succession tend to be quite serious events for all large companies, but they take on added significance in the context of a sovereign fund. Why? Sovereign funds oftentimes underwrite a state’s financial stability and social welfare. In times of crisis, the fund is called upon to cushion the state from the external forces that threaten autonomy. Indeed, these funds are more than just special purpose investment vehicles; many are buffers against the unfettered forces of global capitalism. As such, when a C-level executive (Ceo, Cio, Cro, Coo, Cto, etc) departs, this can result in a change in the fund’s performance (either for good or bad). Put simply, SWFs have to get succession right.

Significantly, many SWFs around the world have been facing some serious executive successions as of late. Consider these examples:

  • The Government of Singapore Investment Corporation is losing Deputy Chairman and Executive Director Dr. Tony Tan to retirement.
  • The Alaska Permanent Fund is losing CIO Jeff Scott to the private sector.
  • Singapore’s Temasek may be losing CEO Ho Ching to retirement sometime this summer (though rumors of her departure have been around for years…and she’s still there).
  • China’s National Social Security Fund is losing Vice Chairman Li Keping this summer (to the China Investment Corporation).
  • The Future Fund is losing Chairman David Murray this year to retirement (after losing General Manager Paul Costello last year).
  • Samruk-Kazyna lost its CEO Kairat Kelimbetov to the Ministry of Finance.
  • The China Investment Corporation’s will soon lose COO Zhang Hongli to retirement.
  • The Abu Dhabi Investment Authority faced a very difficult and sudden succession after Sheikh Ahmed bin Zayed al Nahyan died in a unfortunate glider accident.

All this is to say that there are plenty of C-level transitions taking place. And, given that a new executive tends to break organizational momentum (which can be a good or bad thing depending on the circumstances), the big question is how SWFs can best manage these transitions so that financial performance meets expectations. To answer this question, I thought I’d snoop around the “succession literature” and share some insights.

A paper by Wei Shen and Albert A. Cannella Jr. stood out to me among the 60+ I quickly found on the topic (thank you, Google Scholar) as offering some really good insights for SWFs. This paper offers a detailed examination on the performance consequences of the types of successors the organizations choose and, specifically, how these new individuals drive the performance of an organization. Indeed, the paper may offer SWF Boards some insights into how they might think about these sorts of transitions. Here’s some blurbage:

“Successor origin both reflects succession context and has significant implications for subsequent firm performance…”

“…[in addition to outside successors] there are two distinct types of insider successors: those appointed following their predecessors’ dismissals  and those  appointed following their  predecessors’  ordinary retirements. We labeled these two types of inside successors contenders  and followers,  respectively.”

“…we examined three types of CEO successors. These three types of successors — contenders, followers, and outsiders — differ importantly with respect their ability to manage change, their firm-specific knowledge, and the risk of adverse selection they pose.”

And so what did they find? Well it’s rather interesting. First, if things are going well and you want things to continue going well after an executive’s retirement, then you should hire an internal ‘follower’ (i.e., a protégé). That’s pretty straightforward, as the institutional knowledge in these funds can be priceless (which would trump an outsider), and the dedication to continuity would be desirable (which would trump a contender who thinks they may “know a better way”).

However, if performance has been poor and you want to change things up, then the decision is not really between an insider and an outsider but is more accurately labeled as a decision between an outsider and an inside contender, as both will be looking to restructure the way things are done to improve performance. Interestingly, the findings of this article seem to favor the contender over the outsider, as the former has the institutional knowledge required to manage some continuity, while also having the ability to inject new talent into the management team. Because an outsider is already a disruption, any additional changes to the management could potentially be too destabilizing for the organization (which favors choosing a contender).

To sum up, Peter Drucker argued that the most important factor driving an organization’s success and survival is its top managers. So executive succession is a critical juncture for any organization, which means that changing a management team can be difficult and potentially dangerous. SWFs will thus want to take considerable care in selecting a successor. For a struggling SWF, it looks as though an “internal rival” may be the best executive successor to ensure performance.

Anyway, if you’re really keen on succession literature, this article has a complete review of all of the papers published between 1994-2004 on the topic (seriously). Enjoy.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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