CEO turnover declines despite economic storm
Record departures in financial services and energy
Boards are seeking older and more experienced CEOs to lead in tough times
UK turnover rate remains steady
London, 12 May 2009 – Facing the worst economic crisis since the Great Depression, corporate boards in Europe and North America are holding fast to their current CEOs, according to management consulting firm Booz & Company in its annual survey of CEO turnover. The decline in succession rates in these two regions contrasts with the slight rise in CEO departures globally. The financial services and energy sectors, most affected by the turmoil of 2008, saw outsized increases in CEO exits spurred not only by performance, but also by government interventions and volatility in commodity markets.
Now in its ninth year, Booz & Company’s study of global CEO succession patterns examines the degree, nature and geographic spread of leadership changes among the world’s 2,500 largest publicly traded companies. Included this year for the first time is data on the incoming class of CEOs that sheds light on the career paths of executives who advance to the top of their organisations.
CEO Succession Survey 2008: Stability in the Storm concludes that the nature of the recession is leading boards of directors of Western companies to stick with the leaders they know. The overall rate of turnover was 14.4% (compared with 13.8% in 2007). CEO departures fell 0.5 percentage points in North America and 1.9 percentage points in Europe in 2008 over 2007, while globally that figure climbed 0.6 percentage points. In the UK, the total rate of succession remained steady at 14.7%.
“Although boards feel more comfortable keeping their battle-tested captains at the helm, the economic storm is being viewed as a test of leadership. Scrutiny of CEO decisions has increased, and we expect turnover rates to increase again as boards assess their leaders’ performance,” said Richard Rawlinson, partner at Booz & Company in London.
Among the key findings of the survey:
- The reasons for CEO departures were remarkably consistent with past years. Of the 361 successions among the companies studied, 50% were planned (retirement, illness, long-expected changes), 35% were forced (CEO removed for poor financial performance, ethical lapses or irreconcilable differences) and 15% were prompted by mergers. By comparison, in 2007, 346 CEOs left their companies; 49% of departures were planned, 31% were forced, and 20% followed a merger.
- Financial services and energy led all other industries in turnover rate increases. The financial services industry saw 18% of its CEOs lose their jobs in 2008, breaking with the patterns of previous years where an average of 11.2% of CEOs left. The rate of forced successions in 2008 was 8.8%, more than double the 11-year average of 3.4%. Forced turnover in the energy sector also hit a record high, with 5.6 % of its companies’ CEOs ousted, versus the typical 2.7%, as enormous commodity price volatility in 2008 ended the comfort of steady high returns for much of the 2000s. In the UK, healthcare and telecommunications services companies had the highest succession rates in 2008 (40%).
- The average age of this year’s incoming CEO class is 52.9, nearly two years older than the average 51.0 years of age, which has held steady over the past decade. In the UK, the incoming CEO class has an average age of 48.6 years old.
- Nearly 20% of CEOs have had held the top position before, almost double the 9.8% average rate for the 11 years Booz & Company has studied (1995, 1998; 2000-2008). Importantly, 65.6% of new CEOs have run a business before, with 18.9% having served as CEOs, 27.4% as business unit leaders, and others who had been regional heads, presidents or chief operating officers. “While a defining experience such as a business transformation campaign, turnaround or major new product introduction can help close the deal for a new CEO being hired, it’s clear that what boards value most is the experience of having run a business,” said Richard Rawlinson.
- In Asia, forced removals nearly doubled from 3.8% to 6.1%; in Japan rates jumped nearly four-fold, from 0.8% to 3.1%.
Additional study findings:
The “insider” advantage. Among new CEOs, “outsiders”—those brought in from outside to lead the company—comprised about 24% of the incoming class, compared to 76% who were“insiders,” promoted from within. Further, boards now appear to be “road-testing” potential leaders as chief operating officer or chief financial officer before giving them the wheel; 15% of new insider CEOs were auditioned, meaning they joined the company they now lead within the past three years.
International, but not multicultural. Although 52% of incoming chief executives have previously held an international title, just 13% hail from countries outside the company’s home nation. In the UK, 80% of incoming CEOS are British. All but four of the 361 new global CEOs are men, despite at least half of developed nations’ workforces being made up of women.
Resurgence of the “apprentice” model. More than half of the incoming CEOs in planned successions are assuming office as “apprentices,” meaning their predecessor as CEO has stepped up to the chairman role.This trend grew profoundly in North America, where 2008 saw 57% of new CEOs taking office in an apprenticeship situation, 20 percentage points above the region’s historical average. While the apprentice model has always characterised Japanese businesses—with 82% of that country’s outgoing CEOs over the 11 years studied falling into that pattern—it is unusual in North America, which typically sees just 42% of outgoing CEOs having been apprenticed in the same period.
North American CEOs seen as safest. CEO tenure in North America is the longest it has been since 2000. Outgoing CEOs in the region enjoyed a median tenure of 7.9 years in 2008, versus 7.2 years in the 11 years Booz & Company has been analysing data. In the UK, the average tenure is 5.5 years, the same as the European average.
Seven actions for the new CEO. The report outlines seven steps that today’s new CEO class need to take to steer a course through the current turbulence and position their companies for long term success – such asresetting expectations of how the business will work, affirming or changing the leadership team within 60 days, keeping an ear to the market through customers and suppliers, and engaging the board around its expectations.
Building a better leadership bench
Given the unprecedented conditions in the global economy, the challenge of developing leadership is urgent, particularly for the next generation of CEOs. “Leadership development works best when led by a company’s leaders,” commented Richard Rawlinson. “Boards must be engaged in the process and not leave succession planning in the HR department’s hands.”
This study identified the world’s 2,500 largest public companies, defined by their market capitalisations (from Bloomberg) on 1 January 2008. In the UK, an additional list of the 300 largest public companies was compiled and includes 123 companies that are part of the global list. To identify companies among the top 2,500 that had experienced a chief executive succession event, Booz & Company cross-checked data across a wide variety of printed and electronic sources, including Factiva and Hoover’s. Additionally, the company conducted electronic searches for announcements of retirements or new appointments of chief executives, presidents, managing directors, and chairmen. For a listing of companies that had been acquired or merged in 2008, Booz & Company used Bloomberg. Booz & Company also conducted supplemental research for regional CEO changes not identified by other sources. The full methodology is contained within the report.