When a director or officer joins or leaves a public company, the SEC requires certain information be disclosed in a current report (8-K) under Item 5.02 within four business days. The information required includes basics, such as the officer’s name, effective date and a brief description of any material plan, contract or arrangement. However, the amount of information disclosed, particularly for executive departures, varies greatly.
Audit Analytics tracks all director and officer changes disclosed in Item 5.02 of 8-Ks and, using a custom taxonomy, classifies the nature of the departure and the general reason for such change, if provided. In this post, we look at overall departure trends of Chief Executive Officers and Chief Financial Officers filed in an 8-K Item 5.02 between January 1, 2016 and December 31, 2018, excluding departures disclosed for interim positions.
Unsurprisingly, resignations top the list of departure actions for CEOs consistently across the three-year period, followed distantly by retirement. Departures including personal leave, administrative leave, deceased, and employment ceased have been grouped into an “other” category.
Reasons for departures were calculated as a percent of total 8-K Item 5.02s that provided a reason for CEO or CFO departure.
The top reason provided for a CEO departure across the three-year period was a position change within the company. This type of change often occurs when a CEO assumes a different role, such as Chairman of the Board, or leaves their daily duties but is still on the board or serving in an “advisory capacity”.
These results suggest that companies keep their former CEOs close during times of transition.
Logically, another top reason for a CEO departure includes mergers and acquisitions; if two companies with similar corporate structures merge, one of the CEOs may not survive the M&A.
Overall, the number of CEO changes was less than the number of CFO changes across 2016, 2017, and 2018, indicating there is generally more movement among individuals holding CFO positions than CEO positions.
For CFOs, resignations also top the list for departure actions across the three-year period. Similar to CEOs, the second most common reason for departure is retirement.
In comparison to CEOs, CFOs departed from their position less frequently due to a change in control or mergers & acquisitions. This could be an indication that CFOs are less likely than CEOs to lose their position as a result of corporate transactions.
Other top reasons provided for a CFO departure include leaving due to another opportunity or to pursue other interests.
Consistently for both CEOs and CFOs, over half of the 8-Ks analyzed did not provide a reason for the departure. The percentage of filings with an undisclosed reason is slightly higher for CEOs than CFOs – 69% of CEO departure filings and 61% for CFOs in 2018 – signifying companies may be slightly less forthcoming regarding details surrounding their executive officers’ departures.
While most director and officer changes happen due to mundane reasons, there are certain disclosures with circumstances that warrant closer reading. The timing of C-suite departures can, at times, provide clues to the internal workings of a company despite limited information proffered in 8-K Item 5.02. For example, the occurrence of accounting red flags, such as investigations or restatements disclosed in close proximity to the departure announcement, may be an indication of more serious circumstances.
It is important to keep in mind that an executive being dismissed for cause is rare; less than 1% of the filings analyzed contained a “dismissed for cause” reason for a CEO or CFO departure throughout 2016, 2017 and 2018.
Stay tuned for a follow-up post, which will focus on General Counsel and Chief Operating Officer departures.
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