Companies hanging onto their CEOs

May 14 2009 by Nic Paton Print This Article

The economic crisis has caused a sharp decline in chief executive succession rates in Europe and the U.S, as CEOs have fewer places to go and boardrooms are reluctant to lose their most experienced and battle-tested leaders.

But the survey of CEO turnover by management consulting firm Booz & Company also found that, globally, there was a slight rise in the numbers of CEO departures last year, with the financial services and energy sectors seeing the most turnover, in part because of last year's turmoil, government intervention and volatility within the commodity market.

The study, now in its ninth year, tracks the degree, nature and geographic spread of leadership changes among the world's 2,500 largest publicly traded companies and, for the first time this year, included data on the incoming class of CEOs, with the aim of shedding light on the career paths of executives who succeed in advancing to the top of their organisations.

What it found was that the nature of the recession was leading boards of directors of Western companies to stick with the leaders they knew.

While the overall rate of turnover was 14.4 per cent, compared with 13.8 per cent in 2007, CEO departures fell 0.5 percentage points in North America and 1.9 percentage points in Europe. Within the UK the total rate of succession remained steady at 14.7 per cent, it added.

"Although boards feel more comfortable keeping their battle-tested captains at the helm, the economic storm is being viewed as a test of leadership," said Richard Rawlinson, partner at Booz & Company.

"Scrutiny of CEO decisions has increased, and we expect turnover rates to increase again as boards assess their leaders' performance," he added.

Key findings of the survey included the fact that the reasons for CEO departures had remained remarkably consistent with past years.

Of the 361 successions studied, half were planned (in other words retirement, illness or long-expected changes), just over a third were forced (or where the CEO was removed for poor financial performance, ethical lapses or irreconcilable differences) and 15 per cent were prompted by mergers.

By comparison, in 2007, 346 CEOs left their companies, of which just under half were planned, 31 per cent were forced and a fifth followed a merger.

The financial services industry saw 18 per cent of its CEOs lose their jobs in 2008, breaking with the patterns of previous years where an average of 11.2 per cent of CEOs left, said the survey.

The rate of forced successions in 2008 was 8.8 per cent, more than double the 11-year average of 3.4 per cent, indicative of the turmoil seen there.

Forced turnover in the energy sector also hit a record high, with 5.6 per cent of its companies' CEOs being ousted, versus the typical 2.7 per cent, as enormous commodity price volatility in 2008 ended the comfort of steady high returns for much of the 2000s, said Booz & Company.

Within the UK, healthcare and telecommunications services companies had the highest succession rates in 2008, at 40 per cent.

Within Asia, forced removals nearly doubled from 3.8 per cent to 6.1 per cent and in Japan, which has been among those countries most affected by the downturn, rates jumped nearly four-fold, from 0.8 per cent to 3.1 per cent.

The average age of this year's incoming CEO class was 52.9, nearly two years older than the average of 51 years, which had held steady over the past decade, it added.

However, in the UK, the incoming CEO class was much younger, with an average age of 48.6 years old.

Nearly a fifth of CEOs had held the top position before, almost double the 9.8 per cent average rate for the 11 years the company had been studying this trend.

Just as importantly, nearly two thirds of new CEOs had run a business previously, with nearly a fifth having already served as CEO before, more than a quarter as business unit leaders and others who had been regional heads, presidents or chief operating officers.

"While a defining experience such as a business transformation campaign, turnaround or major new product introduction can help close the deal for a new CEO being hired, it's clear that what boards value most is the experience of having run a business," said Rawlinson.

Among new CEOs, "outsiders", or those brought in from outside to lead the company, comprised about a quarter of the incoming class, compared with three quarters who were "insiders", or promoted from within.

Furthermore, boards now appeared to be much more likely to "road-test" potential leaders as chief operating officer or chief financial officer before giving them the wheel.

Some 15 per cent of new insider CEOs said they were auditioned for the job, meaning they joined the company they now lead within the past three years.

International experience and vision was also clearly becoming more important. More than half of the incoming chief executives had previously held an international title, with just 13 per cent hailing from countries outside the company's home nation.

Within the UK, eight out of 10 of incoming CEOS were British and all but four of the 361 new global CEOs were men, despite at least half of developed nations' workforces being made up of women.

More than half of the incoming CEOs in planned successions assumed office as "apprentices", meaning their predecessor as CEO had stepped up to the chairman role, said Booz & Company.

This was a trend now becoming particularly visible within North America, where 2008 saw nearly six out of 10 new CEOs taking office in an apprenticeship situation, 20 percentage points above the region's historical average.

While the apprentice model had always characterised Japanese businesses, with more than eight out of 10 of that country's outgoing CEOs over the 11 years studied falling into that pattern, it had been unusual within North America, where typically just 42 per cent of outgoing CEOs had been apprenticed in the same period.

Curiously, given the pressures CEOs are under, North America was still seen as the safest place to be a CEO, with tenure there now the longest it has been since 2000.

Outgoing CEOs in the region enjoyed a median tenure of 7.9 years in 2008, versus 7.2 years in the 11 years Booz & Company had been analysing data. By comparison, in the UK, the average tenure was 5.5 years, the same as the European average.

Today's new CEO class needed to take seven basic steps to take to steer a steady course for their organisation through the current turbulence and position it for long-term success, argued Booz & Company.

These included resetting expectations of how the business would work, affirming or changing the leadership team within 60 days, keeping an ear to the market through customers and suppliers and engaging the board around its expectations.

What's more, given the unprecedented conditions in the global economy, the challenge of developing leadership was urgent, particularly for the next generation of CEOs, it argued.

"Leadership development works best when led by a company's leaders," said Rawlinson.

"Boards must be engaged in the process and not leave succession planning in the HR department's hands," he added.