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Global CEO Turnover Set New Record in 2005
Rate of departure for underperformers quadrupled since 1995, with European and North American CEOs topping the list of involuntary exits in 2005.
NEW YORK, May 18, 2006 – Global CEO departures reached record levels for the second year in a row, and may be peaking, according to the fifth annual survey of CEO turnover at the world’s 2,500 largest publicly traded corporations released today by Booz Allen Hamilton. The study also found that performance-related turnover set a new record in North America, and merger-driven successions were at their highest level globally of any year other than 2000.
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:
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Globally, 15.3% of chief executives at the world’s 2,500 largest public companies left office in 2005, a 4.1% increase from 2004, and 70% higher than 10 years before.
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All regions experienced high turnover: Japan reached a record level of CEO turnover, at 19.8%, whereas the other three regions all recorded their second-highest turnover levels, with North America at 16.2%, followed by Europe, at 15.3%, and the rest of the Asia/Pacific region at 10.5%.
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One-third of global CEO successions were performance-related, defined as where the CEO was forced to resign because of either poor performance or disagreements with the board.
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In 2005, North America experienced a record level of performance-related turnover, with 35% of all its departing CEOs leaving involuntarily. Europe, at 42%, experienced near-record levels in performance-driven departures. Asia-Pacific followed with 28% of its CEOs leaving involuntarily; Japan’s rate of forced turnover was 12%. From 1995 to 2005, the departure of underperformers quadrupled. As a result, only 51% of outgoing CEOs globally left office voluntarily, with successions resulting from mergers comprising the difference.
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Overall merger-driven turnover, reflecting the continuation of a new, robust cycle in M&A activity, was at its highest level globally of any year other than 2000, accounting for one in six of this year’s departing CEOs. More than half of these departing CEOs moved on to a new company, into consulting, or retired. However, half of the survivors stayed on in a substantive operational role, while the rest served on the board of directors or as an internal consultant during the transition.
The firm’s study, “CEO Succession 2005: The Crest of the Turnover Wave,” is being published in the Summer 2006 issue of strategy+business, Booz Allen’s quarterly thought leadership magazine, which goes on sale on newsstands in June.
The study’s results reveal that governance reforms are working. They are leading boards of directors to become more responsive to shareholder and regulatory pressure, and to be more proactive in ousting underperforming CEOs. “We believe the current annual rate of CEO turnover is the ‘new normal’,” notes Paul Kocourek, a Senior Vice President of Booz Allen Hamilton. “Today’s typical CEO knows that he will remain in office only as long as performance for investors is acceptable. The CEO’s insider allies are typically gone, or less powerful. No longer can a CEO expect to prolong his career by managing the board.”
The study provides insights on the effectiveness of the most popular CEO recruitment practices, revealing that one oft-employed strategy, hiring CEOs with prior Chief Executive experience, has been increasing. However, as the study found, these “repeat CEOs” perform no better than new, previously untested CEOs. “The message to boards is that the presumed benefits of previous experience as a CEO are a mirage,” said Kocourek. “Chief executives are better served by experience in their own company, in the industry, or with the types of challenges confronting the company.”
Key Study Findings
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CEOs are as likely to leave prematurely as to retire normally. Continuing a pattern from 2004, in 2005 nearly half of all CEO departures were due to poor performance or mergers.
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“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; increasingly, active CEOs are moving directly from one large company to another.
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But “repeat chiefs” perform no better than new, untested CEOs. This pattern has been the same in seven of the eight years Booz Allen has studied. “The challenge of leading an unfamiliar organization evidently more than offsets the benefits of having led a publicly traded company in the past,” said Kocourek.
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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. “Companies that hire outsiders should follow a ‘five-year rule,’ seeking a new CEO before performance declines,” said Kocourek.
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Hiring outsider CEOs often backfires for troubled companies. Looking back at the careers of the “class of 2005,” those who had been hired from the 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% of troubled companies had hired an outsider in the prior two years, compared with only 6% of companies with positive performance records.
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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, departing nonchairman CEOs had produced shareholder returns three times as high as those of CEO/chairmen.
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The former CEO should not remain as chairman. CEOs who serve in the “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 five percentage points lower than the returns achieved by departing CEOs who had the advantage of working with a separate and independent chairman.
Industry-Specific Findings
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Highest-Risk Industries: In 2005, the industries that saw the highest rates of CEO turnover of all types were consumer staples (19.0%), consumer discretionary (18.4%), and information technology (16.8%). Between 1995 and 2005, telecommunications had the highest overall CEO turnover rate (13.1%), followed by industrials (12.6%) and consumer discretionary (12.4%).
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The Safest Industries: The materials industry was the safest for CEOs in 2005, with an overall succession rate of 10.9% during the year. Other industries with low rates of CEO turnover in 2005 include healthcare (11.7%) and energy (14.2%). Between 1995 and 2005, financial services companies had the lowest overall CEO turnover rate (9.4%), followed by consumer staples (11.3%) and materials (11.4%).
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Forced Turnover: Consumer staples and financial services, which historically have had the lowest rates of overall CEO turnover, had the highest percentage of performance-related turnover (39% for both). Information technology (33%) rounded out the top three.
Methodology
Booz Allen studied the 383 CEOs of the world’s largest 2,500 publicly traded corporations defined by market capitalization who left office in 2005, and evaluated both the performance of their companies and the events surrounding their departures. To provide historical context, Booz Allen evaluated and compared this data to information on CEO departures for 1995, 1998, 2000, 2001, 2002, 2003 and 2004.
For the purposes of the study, Booz Allen classified CEO departures as either:
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Merger-driven, in which a CEO leaves after his or her company is acquired by or combined with another.
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Performance-related, in which the CEO was forced to resign, either because of poor performance or disagreements with the board.
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Regular transition, which includes all planned and long-scheduled
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