October 05, 2006
New CEO Turnover Study
Posted by Lisa Fairfax

Spencer Stuart has issued a study on CEO Turnover at S&P 500 companies, which reveals that 36 companies or 7% of such companies have appointed new CEOs between January 1 and June 30 2006.  The number is slightly more than it was last year at this time.  Hence, if CEO turnover patterns are consistent with last year, the number of CEO turnovers for 2006 is set to top the number for last year.  This is consistent with other studies that reveal a general increase in CEO turnovers both within the US and globally.  Thus, last year Booz Allen found that the number of CEO turnovers globally reached its highest rate ever at 15.3%.  Booz Allen interpreted the increases in CEO turnover as a sign that governance reforms were working because boards are becoming more responsive to shareholder and regulatory pressure and hence are more proactive in booting out their underperforming executives.  We have already discussed the accuracy of this interpretation, but these statistics certainly reveal that the tendency to hold CEOs accountable when their companies perform poorly may become a permanent fixture of our corporate governance landscape.

As the Booz Allen study points out, the growth in CEO turnover, particularly turnovers that do not result from retirements, creates a dilemma for boards that must make decisions about replacement candidates.  I am not sure that there are any real insights on the best place to look.  The Spencer Stuart study found that for the beginning of this year, 83% of replacements were internal candidates, which is an increase from 60% in 2005.  This figure suggests that companies may be more cautious in looking outside for their new CEOs. The Booz Allen study suggests that internal candidates do better in the long-run, but when measured in terms of performance, external candidates appear to do better in the short-term.  The study hypothesizes that outsiders may do better because they “shake things up” and can make big structural changes, but then have problems with seeking to mesh with the company’s culture—thereby fizzing out after a couple of years.  As a result, Booz Allen suggests that when boards hire outsiders, they should consider replacing them within about five years.  (Although such a strategy seems likely to undermine the ability of the company to generate long-term organizational changes).  The study also suggests that when boards hire an insider, they must be prepared (and get their shareholders to be prepared) to stick with those insiders through some period of underperformance.  Yet given the short-term focus of many activist shareholders, this seems like a risky proposition.  The Booz Allen study makes it pretty clear that the one thing a board should not do is allow the ousted CEO to hang around as chairman, as this strategy undermines the new CEO’s authority.  Moreover, the study indicates that the strategy of hiring CEOs from other companies may have negative repercussions for both the other company and the industry as a whole.  Regardless of the type of candidate, however, the increase in CEO turnovers creates a complex governance issue for boards with no clear-cut solutions.

Corporate Governance | Bookmark

TrackBacks (0)

TrackBack URL for this entry:

Links to weblogs that reference New CEO Turnover Study:

Recent Comments
Popular Threads
Search The Glom
The Glom on Twitter
Archives by Topic
Archives by Date
January 2019
Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    
Miscellaneous Links