Abstract
Recent years have seen a rapid acceleration in the adoption of stakeholder value creation as a core tenet of sound business practice. We examine the impact of a firm's succession practices on a typical financial stakeholder: one who holds a company's stock as part of a diversified investment portfolio. We find that mainly due to intellectual capital losses at firms supplying talent, external executive hiring decisions expected to maximize the hiring firm's value can reduce shareholders' portfolio value. We use the literature, direct calculation, empirical analysis, and an economic model to quantify costs imposed on those who own shares of firms within the context of a larger portfolio. Assuming managers' value-maximizing assignment to jobs, the estimated cost for the S&P 1500, a representative portfolio, is conservatively 0.98 percentage points per year of portfolio returns. Our research motivates portfolio holders to increase their focus on firms' succession practices.
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