Study Finds Forced Turnover of CEOs Has Reached a Record High

NEW YORK, May 12, 2003 — Companies are setting higher standards of performance for chief executive officers than ever before, and CEOs are falling short in record numbers, according to the second annual survey of CEO turnover at the world's 2,500 largest publicly traded corporations released today by leading management and technology consulting firm Booz Allen Hamilton. And despite the high-profile management flameouts in the U.S., CEO turnover is accelerating faster in Asia and Europe than in North America, the study found.

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:

• Involuntary successions in 2002 increased by more than 70% over 2001, even though the total number of CEO changes only increased by 10%. Of all CEO departures globally in 2002, 39% were forced, performance-based changes, compared to 25% in 2001.



• Regionally, the biggest change occurred in the Asia/Pacific region, which accounted for nearly one of every five (19%) global succession events, compared with 8% in 2001 and 6% in 2000. Forced turnover in Asia accounted for 45% of all transitions there, up from only 6% in 2001.



• North America accounted for 48% of all successions worldwide in 2002, significantly lower than the 64% it accounted for in 2001.



• In Europe, the rate of CEO changes has increased in each of the five years the study examined since 1995. In 2002, 28% of all CEO successions occurred in Europe.



• CEOs grew a bit grayer last year. The mean age of chief executives leaving office in 2002 was 58.1, up slightly from 2000 (56.8) and 2001 (57.1).

The firm's study, "CEO Succession 2002: Deliver or Depart," is being published in the Summer 2003 issue of strategy+business, Booz Allen's quarterly thought leadership journal, which goes on sale at newsstands June 1.

These results underscore the growing influence of shareholders and their representatives, corporate directors, the Booz Allen study concludes. Boards of directors are now exercising their power on behalf of shareholders with a vigor unseen in modern times.

"Business leaders are enduring scrutiny and pressure unseen since the Great Depression," said Charles Lucier, senior vice president emeritus of Booz Allen Hamilton. "The CEO mystique has all but evaporated, and director activism has replaced crony capitalism in the boardroom."

"This phenomenon is now fully global, even in regions not burdened by governance scandals," Lucier noted. CEOs are being replaced at a faster rate in Europe than the United States, and CEO turnover has skyrocketed in Asia, where chief executives of major corporations had been relatively protected from market forces.

"There is no longer any safe haven for chief executives who can't deliver superior results," Lucier concluded.

Key Study Findings

• Boards are judging CEO underperformance more strictly. Chief executives who were dismissed in 2002 generated median regionally-adjusted shareholder returns 6.2 percentage points lower than CEOs who retired voluntarily. It took an 11.9% shortfall to prompt a firing in 2001; in 2000, fired CEOs underperformed retiring chiefs by 13.5%.



• CEO turnover in Europe and the Asia/Pacific region continues to rise. CEO succession is up 192% in Europe and 140% in the Asia/Pacific region since 1995, the study's benchmark year; in North America, succession events increased only 2% during the same period. In the Asia/Pacific region, which had been relatively immune to forced succession, involuntary departures accounted for nearly half of all turnovers last year.



• Merger-driven transitions declined considerably in 2002. Merger-related successions comprised 15% of all CEO turnover globally, down from 27% the previous year and 29% in 2000, as M&A activity declined generally.



• CEOs appointed from outside the company are a high-stakes gamble. Outsiders excel early, outperforming insiders by nearly 7 percentage points in the first half of their tenures. In the "second semester," when most CEOs endure a slump, outsiders underperform insiders by 5.5 percentage points.



• By failing to live up to their early promise, outsider CEOs are at greater risk of being fired than insiders. In 2002, more than half of all turnover of CEOs originally appointed from outside the company were forced changes; for inside appointments, only 44% of all changes were involuntary.

Industry-Specific Findings

• Highest-Risk Industries: In 2002, the industries that saw the highest rates of CEO turnover were utilities (15.8%), telecommunications services (15.6%), materials (13.5%), and energy (12.6%). For the five years analyzed between 1995 and 2002, telecommunications had the highest turnover rate (12.1%), followed by energy (11.3%), information technology (9.7%), and healthcare (9.4%).



• Forced Turnover: Telecommunications services had the highest rate of forced turnover in 2002 (9.4%), followed by utilities (5.7%), materials (5.2%), and information technology (4.7%). For the period between 1995 and 2002, information technology had the highest rate of CEO dismissals (4.3%), followed by telecommunications services (4.2%), consumer discretionary companies (3.1%), and healthcare (2.8%).



• The Safest Industries: Financial services was the safest industry for CEOs in this study — during the period between 1995 and 2002 the financial services industry had the least turnover overall (6.6%) and the fewest forced departures (1.5%). Other industries with relatively low turnover rates during this period were industrials (8.5%), utilities, and consumer discretionary (both 8.9%). In additional to financial services, other industries with low forced turnover in this period were energy (1.7%), materials (1.9%), and industrials (2.0%).

Methodology

Booz Allen studied the 253 CEOs of the world's 2,500 publicly-traded corporations who left office in 2002, and evaluated both the performance of their companies and the events surrounding their departure. To provide historical context, Booz Allen evaluated and the compared this data to information on CEO departures for 1995, 1998, 2000 and 2001.

For purposes of the study, Booz Allen classified each CEO departure as either:

• Merger-driven, in which a CEO's job was eliminated when the CEO of the other company involved in the merger or acquisition assumed control of the enterprise.
• Performance-related, where the CEO was asked to leave by the Board of Directors or there was significant speculation in the business press that performance was the driver of the change, or where the CEO cited job stress as the reason for his or her resignation.
• Regular transition, in which the CEO retired on a long-planned schedule, died in office or left to become the CEO of another company.