Firm studies CEO turnover
The number of CEOs who got the boot reached an all-time high in 2004. This is the conclusion of an annual survey by Booz Allen Hamilton, the international management consulting firm based in McLean, Va.
Performance-related dismissals and other forced departures reached record levels last year, according to the firm, which notes that boards of directors in North America are the slowest to remove underperforming chief executives while European firms are the quickest to do so.
The study also examines the relationship between CEO tenure and corporate performance. A key finding: underperformance - not ethics, not illegality, and not power struggles - is the primary reason CEOs get fired. Forced turnovers are strongly related to poor shareholder returns, says Booz Allen. During the years before they left, dismissed CEOs had generated returns that were 7.7 percentage points lower than those who left office under normal conditions.
Here are some of the key findings of the survey:
• The rate of CEO dismissals has increased by 300 percent from 1995 to 2004.
• Overall, underperforming CEOs were removed after an average of 4.5 years in 2004. In Europe, CEOs removed for poor performance were in office for an astonishingly brief 2.5 years. Boards in North America were the slowest to remove underperforming CEOs, at 5.2 years.
• CEO turnover now matches the normal attrition rate for all employees. The typical employee turnover rate in the US is now about 12 percent per year, excluding layoffs and temporary employees. At 11.7 percent, the total rate of CEO departures in 2004 is roughly equivalent to the overall rate of US employee turnover.
Charles Lucier, senior vice president emeritus of Booz Allen Hamilton, commented that, “From the perspective of turnover, the CEO is just another employee.”
The study also noted that today’s executives tend to focus on delivering short-term results at the expense of strategies that create long-term shareholder value.
More relevant findings:
• CEOs hired from outside tend to inherit companies in much worse shape than those inherited by insiders.
• CEOs are retiring at ever-younger ages. In North America, 17.5 percent who stepped down as part of a planned transition in 2004 were 55 or younger, an increase of 61 percent over the prior year.
• The Sarbanes-Oxley Act of 2002 did not force more CEO turnover in the US. The upward shift in CEO firings occurred from 1995 to 2000, consistent with pre-SOX trends.
• Successful companies are more likely to fire a new CEO. Companies that struggled before their new CEO came in were more likely to keep them longer.
• The industries that saw the highest rates of CEO turnover were industrials (19.5 percent) and utilities (19.0 percent). The energy industry was the safest for CEOs in 2004, with an overall succession rate of 10.3 percent during the year.
Booz Allen’s study was based on a study of 354 CEOs of the world’s largest publicly traded companies who left office in 2004. The company compared this data with information on CEO departures going back to 1995. OGFJ