Boards flex their muscles as CEO turnover stays high

May 24 2007 by Brian Amble Print This Article

The CEO turnover wave may have peaked, but corporate boards are now quicker than ever to replace underperforming CEOs and are focusing more on grooming in-house leaders as the results from leaders imported from outside continue to disappoint.

Booz Allen Hamilton's annual survey of CEO turnover at the world's 2,500 largest publicly traded corporations reveals that annual CEO turnover grew 59 per cent between 1995 to 2006, while performance-related turnover increased by 318 per cent over the same period.

In 1995, one in eight departing CEOs was forced from office. In 2006, nearly one in three left involuntarily.

With a slight fall in the number of CEOs leaving office in 2006 - 357 CEOs left office in 2006, a 1.2 percentage point decrease on 2005 - the CEO turnover wave seems to have peaked.

But this can't hide the fact that a third (32 per cent) of these departing CEOs were still forced to resign because of either poor performance or disagreements with the board.

Conversely, CEO departures due to M&As and buyouts increased in 2006, while these departing CEOs also delivered superior performance for investors.

Almost a quarter - 22 per cent - of all CEO departures in 2006 were as a result of mergers or buyouts, compared to 18 per cent in 2005, with North America and Europe experiencing their highest levels of M&A activity.

Yet even prior success can't guarantee CEO survival. In North America, several CEOs who created above-average returns for investors were forced out in 2006 because of concerns about their ability to deliver future returns.

Meanwhile, boardroom infighting is taking a higher toll on CEOs, with the number leaving because of conflicts with the board increasing from just two per cent in 1995 to 11 per cent between 2004 and 2006.

In Europe, however, boardroom power struggles were responsible for fully 22 per cent of CEO departures in 2006.

"Boards are flexing their muscles when dealing with chief executives who lack a path to future growth," said Richard Rawlinson, Vice President at Booz Allen in London.

"This increasing conflict is heightened by activists who demand board seats, launch proxy battles and mobilise shareholders to force changes."

The impact of this, the report argues, is that the era of the "imperial" chief executive is drawing to a close. Inclusiveness, not autocracy, is the new critical CEO survival skill.

"Give board members a voice in developing strategy, if you want to retain their confidence," Rawlinson said.

Boards also seem to be wising up to the fact that CEOs with experience don't necessarily deliver results. In fact, outsider CEOs who had previously served as the CEO of a publicly traded company delivered slightly worse returns to investors in eight of the nine years studied, than CEOs who rose from within the company.

As a result, the hiring of outsider CEOs has peaked Ė and the study also found that selection of an outsider produces a big downturn in share price, while selection of an insider triggers an upturn.

"As boards realize that experience as a CEO doesn't predict future success, the proportion of prior CEOs will drop off," Richard Rawlinson said. "Most boards today have at least one internal candidate ready to take the helm."

Another startling finding is that in 2006, every underperforming CEO in North America with long tenure had either held the additional title of chairman or served under a chairman who was the former CEO.

In other words, said Rawlinson, independent chairmen achieve better results. Indeed investors enjoyed the highest returns relative to a broad market average when the chairman was independent of the CEO, compared to when the CEO also held the title of chairman, or when the chairman was the prior CEO.

"Having an independent chairman is an increasing trend in the UK and countries like the US can learn from our experiences," he added.