September 05, 2006
CEO Turnover
Posted by Lisa Fairfax

There were two stories in the New York Times today regarding CEO turnover.  Bill Ford at Ford has decided to "step down" and the CEO of Viacom has been outsted.  Both stories had me revisiting the question of CEO turnover and its impact on corporations.  There are a lot of studies suggesting that CEO firing and turnover in general has increased in the past years--and certainly it seemed like there was a time where you could not read the newspaper without being bombarded with reports of CEO firing.

However, much of the available evidence suggests that high CEO turnover is not a good thing.  (Although I do vaguely recall a study by Booz Allen Hamilton suggesting that American companies tend to wait longer than most others when deciding to oust their CEO).  Regardless, other studies--such as the one by Margaret Wiersema published in the Harvard Business Review--suggest that CEO firings do not improve company performance.  This is because generally CEOs are fired when the company is performing poorly--with the firing designed to signal investors that the company is turning itself around.  However, in those cases, the replacement of the CEO is no panacea and instead detracts from the company making real and more fundamental changes.  In other words, people tend to confuse CEO performance with company performance, and thus believe that merely changing the CEO will change a company's fortunes.  Yet because the problem is much more complex, the CEO change tends not to have the intended impact.

Wiersema also suggests that investors may be too impatient with their CEOs.  Indeed, making fundamental changes takes a significant amount of time, and thus even when the CEO change can lead to positive results, those results may not occur in the short term.  And if investors are not willing to be patient, then the new CEO may not be given the chance to accomplish his or her goal.

These issues certainly seem to apply to Ford, which is working in an industry in desperate need of fundamental changes.  Indeed, it is not clear if a CEO change can have a significant impact on company performance.  Hopefully investors are not expecting any quick fix.  And while Bill Ford may not have been the right chief executive for Ford, I always wonder if we truly appreciate the costs of these CEO changes.

(And that's not even mentioning the fact that many CEOs leave with tidy severance packages. . .)

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