CEO turnover hits new record

May 19 2006 by Brian Amble Print This Article

Global CEO departures reached record levels in 2005 for the second year in a row, with performance-related issues the reason for a third of the turnover.

Globally, 15.3 per cent of chief executives at the world's 2,500 largest public companies left their jobs in 2005, a 4.1 per cent increase from 2004 and quadruple the rate of departure seen in 1995.

The figures, compiled by Booze Allen Hamilton for its fifth annual study of CEO turnover, also highlight a dramatic increase in the numbers of CEOs dismissed for underperformance.

One-third of global CEO successions were performance-related in 2005, defined as where the CEO was forced to resign because of either poor performance or disagreements with the board.

Japan reached a record level of overall CEO turnover, at 19.8 per cent, whereas the other three regions all recorded their second-highest turnover levels, with North America at 16.2 per cent, followed by Europe, at 15.3 per cent and the rest of the Asia/Pacific region at 10.5 per cent.

Only half of outgoing CEOs globally left office voluntarily
CEOs are as likely to leave prematurely as to retire normally. Continuing a pattern from 2004, in 2005, only half (51 per cent) of outgoing CEOs globally left office voluntarily, with successions resulting from mergers making up the difference.

Such a high proportion of involuntary departures suggests that global governance reforms are working. In particular, they appear to be leading boards of directors to become more responsive to shareholder and regulatory pressure, and to be more proactive in ousting underperforming CEOs.

Underperformance was particularly severely punished in Europe, where four out of 10 (42 per cent) of CEO successions were related to performance compared to a third (35 per cent) in the United States. Asia-Pacific followed with 28 per cent of its CEOs leaving involuntarily, whileJapan's rate was only 12 per cent.

A further one in six departures were merger-related

"We believe the current annual rate of CEO turnover is the 'new normal'," said Booz Allen Hamilton's Alan Gemes.

"Today's typical CEO knows that he will remain in office only as long as performance for investors is acceptable. No longer can a CEO expect to prolong his career by managing the board."

The study also examined the effectiveness of the most popular CEO recruitment practices and found that hiring CEOs with prior Chief Executive experience has been increasing.

But while "repeat CEOs" are increasingly common - more than one in eight of the CEOs who left office this year had previously served as leader of another company -

they performed no better than new, previously untested CEOs.

According to Alan Gemes, this pattern has been the same in seven of the eight years Booz Allen has studied.

"The challenge of leading an unfamiliar organisation evidently more than offsets the benefits of having led a publicly traded company in the past," he said.

CEOs bought in from outside the company tend to flame, then fizzle
But CEOs bought in from outside the company also fare poorly, tending to flame, then fizzle. During their first two years in office, CEOs brought in from outside produce returns for investors that are nearly four times better than those achieved by insiders. But when the tenure grows longer, insider CEOs tend to do much better.

"Companies that hire outsiders should follow a 'five-year rule,' seeking a new CEO before performance declines," said Gemes.

Another strong message is that former CEOs should not remain as chairman. Indeed the research found that in Europe over the last four years, "apprentice" CEOs whose chairman is their predecessor produced annual shareholder returns fully five percentage points lower than the returns achieved by departing CEOs who had the advantage of working with a separate and independent chairman.

Umesh Ramakrishnan, from head-hunters Christian & Timbers, said that the survey highlighted some important global trends.

"The current trend shows clearly that boards are lazer-focused on performance, quality & results. CEOs like Hewlett Packard's Mark Hurd are creating a new mould where the focus is on building a strong foundation vis-a-vis being an external marketeer.

"Boards that retain us to recruit CEOs require us to follow that pattern. The days of smoke and mirror tactics are over and quiet confidence is in fashion. As a result, anything deviating from the above results in added pressure on the CEO culminating in his or her early departure."