High CEO turnover – outside CEO recruits deliver less than insiders
01/09/2008
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The past year or so has witnessed the biggest exodus of Australian company CEOs for some time.  Allco, ANZ, Aristocrat, Babcock and Brown, BHP Billiton, Centro, Challenger, Fosters, IAG, Lend Lease, Mirvac, NAB, Qantas, Rio Tinto, Santos, St. George, and Westpac, among others, have arranged a change in CEO or announced that one is imminent.

Booz & Company’s annual study of CEO turnover at the world’s largest companies reinforces earlier findings that externally appointed CEOs do not perform as well as internally appointed CEOs.  But in their summarised review they give emphasis to findings that indicate CEOs are not sacked for poor short term results. In fact, they find that even the worst performing CEOs face a low probability of being forced from office in the short term.  We suspect that much of their research was completed before the full impact of the credit squeeze was felt.

Booz & Company also found that boards continue to dismiss CEOs at a higher rate in the 2000s than in the 1990s. There are indications that improved governance contributes to shorter tenures, and to differences in tenures across regions.

The finding of the limited correlation between shareholder performance and dismissals suggests that boards are giving underperforming CEOs more latitude than might be expected. Booz & Company hypothesise that this is because boards lack a suitable pool of internal replacement candidates.

Also, the CEOs recruited from outside the company continue to consistently underperform insiders and to make up a significant share of the departing CEO class.

Among the specific findings for 2007, Booz & Company found that:

Overall turnover is down. At 13.8 percent in 2007, total chief executive turnover continues to fall from its high of 15.4 percent in 2005. The 2007 rate is the lowest since 2003. The slight downturn from the previous year’s rate of 14.3 percent was attributed to small decreases in the global rate of both merger-related and forced turnovers. (We expect a significant increase stemming from the credit squeeze in next year’s results.)
Forced succession rates have stabilised. In 2007, 4.2 percent of CEOs were dismissed. This is a much higher rate than the 1.1 to 2.0 percent prevalent in the 1990s, but only slightly above the average of 3.8 percent in the 2000s. Booz & Company attributes this increase to the legislative and regulatory reaction to corporate scandals, the rise of the corporate governance movement, and the increasing activism of institutional shareholders.
Europe leads in turnover. At 17.6 percent in 2007, the overall succession rate for European CEOs was significantly higher than for their North American counterparts. They attributed this largely to a planned succession rate of 8.3 percent. While Australian rates were not mentioned, our own GuerdonData® indicates Australia’s rates are similar to and, in some years, higher than Europe’s. • Boardroom infighting remains high. Board disputes and power struggles have accounted for more than one-third of all CEO dismissals since 2004, up from less than a quarter prior to that.
Succession patterns vary by region. The U.S. continues to favor a governance model in which the CEO also serves as chairman of the board. New North American CEOs often begin as “apprentices,” meaning that the outgoing CEO remains on the board as chairman. In Japan, outgoing CEOs always become chairman, but the role is mostly ceremonial. In Europe, few CEOs hold the chairman title, and the apprenticeship model is much less common. Unfortunately, Australian data was not reported. However, we know from GuerdonData® that most board chairmen are non-executives, most managing directors are succeeded by internal appointees, and most managing directors leave their company on their position being taken up by another.
A CEO who is also chairman is more secure than one who is not. Globally, of all CEOs departing in 2007 who never held the title of chairman, half were forced to leave, compared with 34 percent of those who held the title of chairman at the end of their tenure, and only 26 percent of those who held the title of chairman at the start of their tenure. In North America, the disparity was even greater. • Booz and Company think what they call the “two-year rule” is a fallacy because, contrary to the “conventional” wisdom, in their study few CEOs faced dismissal after two or three years of poor share price performance. We wonder…Guerdon Associates will research and report on this in coming months.
Boards still opt for outsiders; outsiders continue to underperform. More than 20 percent of all CEOs are brought in from outside the company, despite the fact that in North America and Europe outsiders, on average, underperform insiders. For all 10 years studied, companies headed by “North American outsider CEOs” (we assume Booz and Company actually mean outsiders appointed to North American companies, as opposed to North Americans appointed to head any company) underperformed regional market returns by 1.0 percent on average, and the gap for European outsiders was 2.2 percent. Again, no data for Australia was reported.

Booz and Company’s report can be found HERE.

© Guerdon Associates 2021
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