Reputation Rx - CEO TURNOVER

CEO TURNOVER

While 84% of directors believe that the importance of a CEO succession plan has increased, only about half of boards actually have one in place, according to Korn/Ferry International's 34th Annual Board of Directors Study of Fortune 1000 organizations.

Booz & Co. released its annual CEO turnover report, "CEO Succession 2008: Stability in the Storm," that shows that the financial crisis has held down the rate of CEO turnover. Booz' rationale for this is that CEO consistency is critical during times of great unknowns. Among the study findings...

CEO turnover rose slightly on a global basis, from 13.8% in 2007 to 14.4% in 2008, but turnover declined in North America and Europe. Succession rates in these bruised economies decreased by .5 and 1.9 percentage points, respectively. Surprising considering that Europe and North America had led other regions in CEO turnover in the previous two years.
The reasons for CEO departures in 2008 remained consistent with past years. Of the 361 succession events among the world's 2,500 largest public companies last year, 180 were planned, 127 were forced and 54 were prompted by mergers and acquisitions. Forced successions crept up in 2008 on a worldwide basis, but fell in North America and Europe.
Outgoing CEOs are leaving at older ages.
CEO tenure is the longest it has been since 2000. Outgoing North American CEOs had a median tenure of 7.9 years in 2008 vs. 7.2 years over the last 11 years.
Outsider CEOs - those brought in from outside the company - make up about 24% of incoming CEOs.

Chief Executive Online identified that an average of 60 senior management changes were reported at publicly traded companies in December 2008 and January 2009. The analysis also revealed that the retail and banking sectors lead the turnover with 18 and 17 transitions, respectively. Out of the total transitions, CEOs make up for more than 40%. Most of the outgoing CEOs either voluntarily stepped down or are employed elsewhere. The average tenure of outgoing CEOs was about 8 years for those leaving in December and 7 years for those leaving in January. Departing CFOs had tenure of just 2 years. Filling the empty CEO, Chairmen and COO positions were mostly internal promotions (73%). (January/February 2009)

A Wall Street Journal survey of 30 companies in the S&P 500-stock index which removed CEOs between January 2005 and June 2007 revealed that the shares of those companies have declined far more often than they have increased. Recruiters, consultants and executives believe that the problems at such companies are too big for a single, fresh leader to repair. They believe that a new CEO generally has about 18 months to show progress before shareholders get restless.

Successful successors are typically decisive leaders with exceptional listening skills and ability to interact with all of their stakeholders, according to J. Brunswick of consulting firm Hayes Brunswick & Partners LLC. For example, Mark Hurd, CEO of Hewlett-Packard holds frequent meetings with customers and is accessible and open to criticism from lower-level staffers. H-P shares have more than doubled since Hurd was appointed CEO.(The Wall Street Journal, June 18, 2008.)

Booz & Co. published CEO Succession 2007: The Performance Paradox. Among its many findings from an analysis of CEO turnover at the 2,500 biggest public companies, the analysis revealed few links between short-term shareholder performance and CEO firings over a 10-year period. The average rate of a CEO getting fired for poor performance was only 2.1 percent. Even CEOs of companies in the bottom 10 percent of performance faced only a 5.7 percent chance of termination the following year. Other statistics from the report:

17.6% of European CEOs departed in 2007 compared with 15% of Americans and 10% of Japanese.
The average tenure of an American CEO in 2007 was just over nine years and in Europe less than seven years.
An alarming 37% of changes at the top spot in Europe were due to firings, compared with 27% in America and 12% in Japan. Booz attributes this to tightening of corporate governance in Europe.
Board disputes and power struggles drive a third of CEO firings on both sides of the Atlantic.

BusinessWeek (June 30, 2008) noted that "Corporate watchdogs are rarely thrilled to see a chairman replace an ousted chief executive, except on an interim basis. Among other things, the oversight role means the chair may share some of the blame when things go wrong. As veteran leader Jack Creighton noted in The McKinsey Quarterly, putting a CEO-in-waiting at the head of a board can also erode trust. 'The last thing you want is for the CEO to think the chairman is after his or her job,' Creighton says."

The Wall Street Journal reported that more than a dozen U.S. companies have installed independent board members as permanent CEOs since late 2004. Among the factors contributing to these appointments include the rise in CEO turnover...internal successors are often not ready for the top spot or companies have such deep-seated problems that make it hard to recruit outsiders. Additionally, there is increasingly a deep pool of outside executives in the boardroom. Examples of companies that have named independent board members to CEO include Boeing, Delta Air Lines, Bristol-Myers Squibb, Sun-Times Media Group and Newell Rubbermaid. (February 4, 2008)

A study by management consultant Booz Allen Hamilton found that corporate boards are three times more likely to force out their CEO for performance-related reasons than they were ten years ago. Whereas only one in seven CEOs were ousted in 1996, nearly one in three were pushed out in 2006 due to poor performance. The annual study found that 357 CEOs (14.3%) of the world’s largest 2,500 public companies left their positions in 2006. Of the 357 departing CEOs, 4.7% were forced out. Turnover in 2006 was slightly lower than 2005 turnover, with 15.2% of the world’s largest companies’ CEOs departing. Booz Allen attributes the high turnover rate to a new, post-Enron boardroom culture of increased regulatory scrutiny, demanding activist hedge funds and private equity investors, and the fall of the imperial CEO.

Kevin P. Coyne and Edward J. Coyne Sr. reported in Harvard Business Review (May 2007) that senior executives are at significant risk of losing their jobs when a new CEO arrives. Worse, their new job is likely to be a lower position or at a smaller firm.

In companies where the CEO remained constant, proxy level senior management turnover averaged 16% annually, with 8.5% voluntarily leaving office and 7.5% of outgoing executives forced out.
At companies where the new CEO was an internal candidate, the rate increases to one in five, with 12.5% of senior executives leaving involuntarily.
Senior management exits are the highest when an outsider CEO is appointed, with involuntary turnover averaging 26%.

Equally disturbing, once senior managers are forced out by new CEOs, their lateral or upward job prospects are dim. Of the 400 proxy-level executives who left following the arrival of a new CEO in 2002 or 2003, none moved to a proxy-level job in any large U.S. firm. The authors suggest the following strategies for improving the odds of job retention:

Show your goodwill. Let your new CEO know you are willing to help him realize his vision.
Leave your baggage at the door. Don’t burden the new CEO with your own agenda.
Study the new CEO’s working style. Ask your new CEO about his likes and dislikes directly.
Understand the CEO’s agenda. Confirm your understanding of the CEO’s agenda directly with him. Provide constructive suggestions about actions to increase shareholder value since that measure will be used to evaluate his fate.
Present a realistic and honest game plan. Don’t hide or gloss over negative information.
Be on your “A” game. Ensure face time with your new CEO.
Offer objective options. Help your CEO translate his vision into tangible decisions.

Heidrick & Struggles, a leading executive search and leadership consulting firm, partnered with the Center for Effective Organizations at the University of Southern California’s Marshall School of Business to conduct the 10th Annual Corporate Board Effectiveness Study. The study yielded several key insights about CEO succession planning and compensation:

Less than two-thirds of directors consider their boards effective at planning for CEO succession (63%). This is a considerable improvement from 2003 (53%).
A great majority of directors (84%) say they have effective evaluation of CEO performance.
Almost four in 10 directors (38%) feel that CEO pay is too high in most cases. Half say it is about right with a few exceptions.
On the other hand, 76% consider their own CEO’s compensation program to be effective.

Heidrick & Struggles’ new book, Riding Shotgun: The Role of the COO, provides a new understanding of the often little-understood role of Chief Operating Officer. While the role of COO is not always that of “deputy CEO,” there are usually few executives better qualified to take the reins in the event of the death or sudden departure of the CEO. The authors – Nate Bennett and Stephen Miles - develop a framework for understanding who the COO is, why a company would want to create this position, and the challenges associated with successful performance in the COO role.

North American management turnover was way up in 2006, according to BusinessWeek. Executive-level churn – from directors down to VPs – rose 68% in 2006. The drug/biotech industry saw the most CEO and CFO turnover. Liberum Research conducted the analysis using SEC filings and press releases of North American publicly traded companies.

USA Today has compliled a list of CEOs who died while in office. Although it may seem unusual, several CEOs have died each year while holding the position. This event poses many challenges for companies and boards.

An article on Interim CEOs appeared in The Wall Street Journal's In The Lead column on 18 December 2006. The article by columnist Carol Hymowitz mentions that this new breed of CEO can underscore the board's failure to have a successor in place. She writes that Interim CEOs have the onerous task of keeping the organization humming without the authority to hire new leaders or make strategic decisions. Additionally, some Interim CEOs do not want to look as if they are running too hard for the corner office and can accidently downplay their accomplishments to their disadvantage.

Succession planning also becomes an issue when dealing with responding to a chief executive's health crisis. As discussed by Joann S. Lublin in The Wall Street Journal article "No One to Turn To", a lack of preparation often becomes apparent for most companies when a CEO falls ill. Much has been touted of McDonald's preparedness following Jim Cantalupo and then shortly thereafter with Charlie Bell but this is more the exception rather than the rule. A recent study by the Society for Corporate Secretaries and Governance Professionals shows that just 38 percent of publicly held companies have drafted written succession plans. And another study by Corporate Board Member Magazine and PriceWaterhouse Coopers found that nearly half of major board directors were dissatisfied with their company's handling of succession issues.

According to management consultancy Booz Allen Hamilton, global CEO turnover set another record in 2005. For several years now, Booz Allen has conducted CEO succession research and found that seven of the world's largest companies changed leadership. This is a significant rise from one in 11 in 1995. About 35% of CEOs in US companies were forced out last year, up from 12% in 1995. Some of their key findings are:

Governance reforms are working. Of companies worldwide, 15.3 percent replaced its chief executive in 2005. This is the highest level in the eight years we’ve studied and 70 percent higher than in 1995.
CEOs are as likely to leave prematurely as to retire normally. Nearly half of all CEO departures in 2005 were due to poor performance or mergers.
“Repeat chiefs” are increasingly common. More than one in eight of the CEOs who left office this year had previously served as leader of another company.
Outsider CEOs flame, then fizzle. During their first two years in office, CEOs brought in from outside the company 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. One implication: Companies that hire outsiders should follow a “five-year rule,” seeking a new CEO before performance declines.
Nonchairman CEOs are now the best performers. Of CEOs who left office in 2005, those who never served as chairman of their companies outperformed those who served in the dual role of chairman and chief. In North America over the last three years, nonchairman CEOs produced shareholder returns three times as high as those of CEO/chairmen.
The former CEO should not remain as chairman. CEOs who serve in an “apprenticeship” model, in which the chairman is their predecessor, generally do poorly. For example, in Europe over the last four years, “apprentice” CEOs produced annual shareholder returns that were 5 percentage points lower than the returns achieved by departing CEOs who had had separate and independent chairmen to work with.
In 2005, North America experienced a record level of performance-related turnover, with 35 percent of all departing CEOs forced out. Europe and the Asia/Pacific region (not including Japan) saw declines from their record turnover levels of 2004, which had been triggered by rapid departures of newly hired chief executives.
Troubled companies look for outsiders, who don’t necessarily succeed. Among the CEOs who left office in 2005, those who had been hired from outside had taken charge of companies with, on average, far worse performance records than those who had been promoted from within. In North America, for example, 29 percent of the companies with negative performance in the prior two years had hired an outsider versus only 6 percent of positively performing companies.