CEOs ‘seldom dismissed over short-term results’
Dubai, May 29, 2008
Chief executive officers are seldom dismissed for poor short-term results, according to a study.
According to the latest annual Booz & Company survey of CEO turnover at the world’s 2,500 largest publicly traded corporations, the seventh annual study revealed that counter to common perceptions, the worst-performing CEOs actually faced a low probability of being forced from office in the short term.
Over the range of years studied—1995, 1998, and 2000 to 2007, Booz & Company found that the average rate of a CEO getting fired specifically for poor performance was only 2.1 per cent.
In addition, a comprehensive analysis of data from all ten years of all 2,500 companies studied each year found that even CEOs of companies in the bottom tenpc of performance—defined as those whose two-year total shareholder returns had fallen by 25pc in absolute terms and 45pc relative to regional industry peers after two years—faced only a 5.7pc chance of termination in the next year.
For the last seven years, Booz & Company’s study of CEO turnover has charted the emergence of a more demanding environment for CEOs and boards based on the linkages between CEO tenure and corporate performance.
The report, “CEO Succession 2007: The Performance Paradox,” will be published in the Summer 2008 issue of strategy+business, Booz & Company’s quarterly thought leadership magazine, on newsstands June 10th.
Among the findings:
· The overall rate of CEO turnover – which includes planned successions, dismissals, and merger-related departures – slightly decreased in 2007 to 13.8pc, compared with 14.3pc the year before. This carries on a downward trend from the peak seen in 2005 of 15.4pc. In total, 345 CEOs left office last year, a 3.5pc decrease from 2006, and a 10pc decline from two years ago.
- The slight downturn from the previous year’s rate can be attributed to small decreases in global rates of merger-related and forced turnovers. CEO departures due to M&As dropped to 2.8pc from a cyclical high of 3.2pc in 2006.
- The rate of CEOs being fired fell slightly in 2007, but remained high. Nearly one out of every three (30.4pc) departing CEOs was forced to resign due to either poor performance, an ethical lapse, or disagreements with the board.
- The rate of planned successions was 6.8pc in 2007, just over its average for the years studied.
· In 2007, the overall turnover rate for European CEOs was 17.6pc, significantly higher than for their counterparts in North America (15.2pc), Japan (10.6pc) and the rest of the world (9.1pc). Europe’s increase can be attributed largely to a planned succession rate of 8.3pc, compared with 6.8pc worldwide.
· CEOs in North America have the longest average tenure by far – 8.3 years in 2007, with a 10-year average of 9.4 years. This compares with 7.0 years in 2007, with a 10-year average of 6.6 years for European CEOs.
· However, the global median tenure for a CEO who left office in 2007 was six years, the same as in 1995, and the same as the average over the 10 years of the study.
· The safest industries for CEOs include energy (5.8pc) and industrials (8.8pc). Industries with the highest level of turnover include telecommunications (21.7pc), information technology (17.4pc), and financial services (14.4pc).
“The ‘two-year rule’ – the notion that boards dismiss CEOs after two or three disappointing years – is a myth,” said Bahjat El-Darwiche, Principal at Booz & Company.
“The good news is that boards are providing ample time for CEOs to develop and execute on their strategies. But our experience suggests that there is substantial room for improvement in the way boards oversee their chief executives, plan for successions, and develop pools of top leadership talent,” added Rabih Abouchakra, Principal at Booz & Company.<