The bursting of the tech bubble. Accounting scandals. Lack of investor confidence. The flailing economy. Management turnovers.
We've yet to see the end of the fallout from the simultaneous occurrence of these troubles, and many companies and employees have been deeply affected by them, including—and in some cases, especially—the chief executives, some with good reason. Sympathy for them runs scarce here in Houston, where energy companies have been especially hard hit by scandal.
A recent Booz Allen Hamilton (BAH) survey of the world's 2,500 largest publicly traded companies found that the number of chief executive officer departures increased dramatically during 1995-2001—up 53%—and at an accelerating pace. The energy industry has seen one of the highest rates of CEO succession, second only to telecommunications, the study found.
The study examined the link between CEO tenure and corporate performance, comparing CEO turnover in three world regions and in specific industry sectors. Each CEO succession was assigned to one of three categories: merger-driven, performance-related, or regular transition, which was usually marked by scheduled retirement.
It's important to note that in this new era of full disclosure, BAH admitted that although CEO Jeffrey Skilling departed Enron Corp. citing personal issues as the reason, the study classified his departure as performance-related.
Key findings
Key findings among energy companies included:
Among the CEO departures in energy companies, 52% were driven by mergers. In these cases, a CEO's job was eliminated after the merger. This far exceeds the percentage of merger-driven departures in the other industries examined.
At 13%, energy companies had the lowest percentage of CEO departures driven by poor job performance. Conversely, 42% of departures from information technology companies were performance-related.
Excluding CEOs who departed following a merger, average CEO tenure from 1995 through 2001 was 10.2 years in the energy industry, above the average 8.4 years across all industries. Only financial services saw longer tenures, with 10.3 years on average.
The above-average tenure for energy CEOs may be due in part to their below-average age of ascension. In the energy business, the average age for starting CEOs is 48.5, while across all industries the average is 50.
The three geographical regions that BAH studied were North America, Europe, and Asia-Pacific. One of their more surprising findings is that the proportion of CEOs departing for performance reasons was highest in Europe. Across the years studied, in fact, European CEOs had the lowest likelihood of achieving a regular transition. Tenure in Europe averaged 6.5 years because the proportion of performance-related actions was highest there and because poorly performing European CEOs were removed quickly.
The Asia-Pacific region had the shortest tenure in regular transitions and the longest tenure in performance-related transitions. BAH hypothesized that tenure among these CEOs is so short because they—particularly those in Japan—were a decade older than those in the other two regions studied when they assumed the CEO title.
Another key finding of the study is that an executive holding the titles of both CEO and chairman of the board was more likely to deliver greater returns to shareholders and higher net income growth. Also, these multititled execs are more likely to have a longer tenure and a regular transition. BAH reasons that this correlation stems from those occasions when boards give an incoming executive the CEO title but reserve the board chairmanship until that executive demonstrates success.
Conclusions
The study led BAH to hypothesize that CEO turnover will continue to increase worldwide, for a number of reasons.
The main reason for so much recent turnover among all CEOs, the study concluded, is that shareholders are anxious for returns on their investments. In fact, they want those returns now.
BAH said, "As our market analysis shows, continued failure to exceed the market's average returns is the surest path to a CEO's early departure."
Thus, CEO turnover is a means to link management to the creation of shareholder value. Secondly, all CEOs perform better during the first half of their tenure. This leads to more pressure for more-frequent changes.
Third, the public is more demanding that CEOs bear responsibility for their company's problems.
And the final reason for increasing turnover is that the combination of shorter tenures and a younger age at ascension means there are now more experienced CEOs available to take the helm.