Booz Allen: Forced Departures of CEOs Declined in 2003 But But Remain Near Record Levels
 

Forced departures of CEOs declined last year, although involuntary turnover remains at near-record levels, according to the third annual survey of CEO turnover at the world’s 2,500 largest publicly traded corporations by leading strategy and technology consulting firm Booz Allen Hamilton. In addition, the study found that dividing the roles of CEO and Chairman does not result in superior performance, despite the expectations of governance activists.

The study comprehensively examines the linkages between CEO tenure and corporate performance, comparing CEO turnover in major regions and in specific industry sectors.  Among the findings:

• Companies that split the CEO and Chairman roles perform worse than companies with a single Chairman/CEO.  Dividing the two positions has been the norm in Europe for at least a decade, and has become the governance movement’s cause célèbre in the U.S.  But returns to investors are lower – 4.7% per year lower in Europe, and 4.1% lower in North America – when the roles are split.
  

• Globally, performance-related successions declined 29% from 2002, and represented 31% of all CEO departures, compared to 39% in 2002.  Overall, 9.5% of the world’s 2,500 largest public companies changed chief executives in 2003, compared to 10.7% in 2002. Still, the rate of CEO dismissals has increased by 170% from 1995 to 2003.
  

• Regionally, the succession rate was highest in Japan, where 13.8% of the largest companies changed their CEO – a 42% increase over 2002.  The rate of CEO succession in Europe remained at 9.7%, but for the first time was higher than in North America, at 9.6%.

• Globally, 28% of the CEOs departing in 2003 were “outsiders,” hired into the job from another company – the highest proportion in any year that we studied.

The study’s results reflect the increasing emphasis on corporate governance reform – and the inherent flaws in the “conventional wisdom” pursued by some governance reformers.

Key Study Findings

In North America, fewer CEOs were forced out last year.  In the U.S. and Canada, involuntary successions accounted for 31% of all turnover in 2003, down from 2002’s peak of 39%, but higher than in any other year studied.

Europe has become the pacesetter in forcing out underperforming chief executives.  Top European companies experienced the highest-ever rate of forced succession events: Nearly half of all CEO turnovers in Europe in 2003 were performance-related.  Forced turnover of CEOs of Germany’s largest companies reached an extraordinary 8.1% in 2003, more than double the global average and the highest level in any region in any year we’ve studied.

Most companies split the CEO and Chairman roles.  More than half the departing CEOs – 55% – in the six years we have studied did not hold the title of chairman.  Just 28% carried both titles throughout their entire tenure.

The outsider who comes in to whip a company into shape is more likely to get a thrashing.  Forced turnover of CEOs who were hired from outside the company reached striking levels in 2003; In North America, 55% of outsiders who left were forced to resign; in Europe, 70% left involuntarily.

The best-performing leaders come from within.  Former chief executives do not deliver superior performance at a new company.  To the contrary, over the six years of our study, CEOs who had previously led other companies delivered returns for investors 3.7% per year lower than first-timers.

 A tough job is taking its toll on CEO tenure.  The average term for chief executives who left office last year was only 7.6 years, among the lowest we’ve seen since 1995. Regionally, North American CEOs enjoyed the longest terms at 9.4 years, and European tenures are the shortest, at 6.5 years.

Scandalous CEO behavior is relatively rare.  Despite extensive media attention to this issue, only a handful of company leaders – no more than 0.3% in any year of our study – have been dismissed due to accounting irregularities or financial shenanigans.

The younger the CEO when hired, the higher the likelihood of being fired.  Chief executives forced from office last year were, on average, 49 years old when they were hired; CEOs who retired voluntarily were five years older when they started.

Highest-Risk Industries: In 2003, the industries that saw the highest rates of CEO turnover were utilities (14.3%), energy (11.5%), healthcare (11.3%) and materials (10.7%).  For the period covering 1995 through 2003, telecommunications had the highest turnover rate (12.0%), followed by energy (11.9%), materials (11.5%), and industrials (11.1%).

Forced Turnover: Utilities had the highest rate of forced turnover in 2003 (5.7%), followed by telecommunications services (5.2%), and information technology (4.9%).  For the period between 1995 and 2003, telecommunications services had the highest rate of CEO dismissals (4.5%), followed by information technology (4.0%) and consumer discretionary companies (3.3%).

The Safest Industries: Financial services was the safest industry for CEOs in this study – during the period between 1995 and 2003 the financial services industry had the least turnover overall (7.7%) and the fewest forced departures (1.8%).  Other industries with relatively low turnover rates during this period were consumer staples (9.7%), and healthcare (10.3%).  In addition to financial services, other industries with low forced turnover in this period were energy (1.9%), materials (2.2%), and industrials (2.2%).

To  view the complete study, click HERE.