Short-term Safety for CEOs? June 16, 2008 Edited by Jeremy Cohen
CEOs may be sweating bullets over the economy's dismal state, but here's some news to help them breathe a little easier: A new analysis by management consulting firm Booz & Company found little correlation between poor short-term shareholder performance and CEO dismissals over a 10-year period.
Indeed, 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—the survey found the average rate of a CEO getting fired specifically for poor performance was only 2.1%. In addition, even CEOs of companies in the bottom 10% of performance faced only a 5.7% chance of termination in the next year.
Among the study's other findings:
• The overall rate of CEO turnover—which includes planned successions, dismissals and merger-related departures—slightly decreased in 2007 to 13.8%, compared with 14.3% the year before.
• 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 2.8% from a cyclical high of 3.2% in 2006.
• The rate of CEOs being fired fell slightly in 2007, but remained high. Nearly one out of every three (30.4%) 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 6.8% in 2007, just over its average for the years studied.
• The safest industries for CEOs include energy (5.8%) and industrials (8.8%). Industries with the highest level of turnover include telecommunications (21.7%), information technology (17.4%), and financial services (14.4%).
"The 'two-year rule'—the notion that boards dismiss CEOs after two or three disappointing years—is a myth," says Gary L. Neilson, senior vice president of 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."
One reason boards are taking several years to replace underperforming CEOs may be a lack of candidates who are ready and able to take over the top spot, the report explains. This hypothesis is supported by the finding that North American and European boards continue to hire outsiders as CEOs, even though they have consistently underperformed CEOs who rise through the ranks.
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