Reports Booz & Company As Part of 10th Annual Global CEO Succession Study. A Decade of Data Reveal Global Norms Emerging; Russia Follows the Global Trend Although Differences are Still Significant.
Moscow, May 18, 2010 – CEO succession rates among Russia’s top 100 companies is 20% -- considerably higher than in Europe or globally, 15.5% and 14.3%, according to Booz & Company’s Annual Global CEO Succession study. This year Booz & Company, an international management consultancy, prepared it 10th Annual Global CEO Succession Study while first time in history making a deep dive into a Russian market.
Booz & Company’s study of worldwide CEO succession patterns examines the degree, nature and geographic distribution of chief executive changes among the world’s 2,500 largest public companies. Research identifies 3 major types of successions: planned, forced, and caused by a merger. This year, a sample of 100 largest Russian companies by revenue, representing 11 industries, was analyzed. This provided a unique opportunity to compare global and Russian trends in CEO turnover.
The fall in emerging market valuations last year boosted the representation of North America and Japanese companies in the global ranking. Consequently, share of companies from emerging markets in a global sample decreased, e.g. only 29 Russian companies made it to the list of 2500 largest public companies worldwide vs 53 a year earlier. The key highlights of the global study, analyzing this year trends as well as 10-year patterns, are as follows:
- Decrease in CEO succession rates and convergence across regions and sectors. While CEO succession rates at the world’s 2,500 largest companies held steady at a high annual rate of 14.3% in 2009, the number of chief executives actually forced from office fell in nearly every region and industry. CEO turnover rates equalize across regions and industries. The percentages of CEOs replaced each year in Europe and Asia (excluding Japan) are now at levels closer to those in North America and Japan. Similarly, turnover rates have harmonized across industries, with 10-year averages settling between 12 and 14% for all except telecommunications (16.9%).
- No excuses for poor performance. CEOs forced from office significantly underperformed those leaving on their own terms. Never was this more dramatic in the past decade than 2009, when chiefs departing on a planned basis delivered median relative shareholder returns of 6.0% compared with -3.5% for terminated CEOs. Overall, out of the 357 succession events that occurred in 2009, 83 were forced departures (where a board removes a CEO for poor financial performance, ethical lapses or irreconcilable differences).
- A trend toward appointing insiders. Boards have picked insiders over outsiders to lead their companies 80% of the time since 2000, not surprising in light of an average 2.5% in relative shareholder returns, compared with an anemic 1.8% for outsider CEOs over the past seven years. “Companies that choose an outsider to lead may expect to pay a price in performance,” said X, X at Booz & Company. “The allies and contacts that an insider brings to the post make a difference to the bottom line. Boards looking to bring in an outsider’s perspective have to seriously consider whether the price is worth the tradeoff.”
- A separate Chairman. In 2000, roughly half of North American and European CEOs held the dual roles of CEO and Chairman. At decade’s end, that number fell to 16.5% and 7.1% for these regions, respectively.
- CEOs must do more, and faster. In just the past decade, boards have shaved nearly two years off the average CEO’s tenure, from 8.1 years to 6.3 years. And while they are leaving office at about the same age as they have historically, today’s departing CEOs were older when they entered office: 53.2 years for those who exited in 2009 versus 50.2 for those who exited in 2000.
2009 was the first year when the situation with CEO succession in Russia was analyzed in detail. While the results of the analysis of Russian situation do not provide a detailed understanding of long-term trends, key findings provide a good opportunity to compare Russian and global trends in CEO succession:
- Increasing and higher-than-global CEO succession rates in Russia. Succession rates among Russia’s top 100 companies in 2009 is 20% -- considerably higher than the European or global rates, 15.5% and 14.2% respectively. The turnover rates are supposedly higher than in preceding years (according to the dynamics sample of Russian companies included in the global list).
- Poor performance is not a key driver of CEO turnover in Russia. In Russia, planned successions took place in over half of the companies where CEO changes occurred, while 7% of successions were forced compared to global number of 3.3%, its lowest level since 2003. Surprisingly, within forced successions in Russia only 3% of CEOs turnover was due to poor performance. Analysis demonstrates that CEO turnover in Russia can be attributed to four primary reasons: power shift (changes in ownership or in the groups, controlling the stated-owned company), the need for new management skills, historic trend.
- High role of outsiders as CEOs. In 2009 in Russia half of new CEOs were “home grown”, the rest came from outside. This behavior differs from other markets, where insiders are preferred as candidates for CEO positions due to company experience and existing track record. However, in 2009 insiders were significantly less likely than outsiders to experience forced successions (30% vs. 80%), which is quite similar to the pattern in Europe during previous years, 2005-2008.
- There is a trend to separation of CEO and Chairman roles. Only 16% of CEOs in the Top 100 Russian companies in 2009 held the Chairman title which confirms that Russia follows the global trend of splitting CEO and Chairman roles. However, currently there is a higher percentage of CEOs in Russia holding chairman title as opposed to Europe (15% vs 7.1%).
- Faster career, shorter experience. Research suggests that career progressions in Russia are much faster than in Europe or US given the limitation of qualified management staff and fast business growth. The average tenure for outgoing Russian CEOs in 2009 was 4.2 years, significantly lower than in other markets. Instability of the Russian economy, high turnover of executives and lack of loyalty from both employee and employer side, lead to shorter tenures for CEOs. CEOs in Russia remain relatively young compared to their foreign colleagues – 46 years. The average age of new CEOs in 2009 in Russia is 6-7 years lower than that of their European and American counterparts.
Industry distribution of CEO successions in Russia and globally demonstrate significant differences:
- Globally, financial services and telecommunications are leading in CEO turnover. In 2009, the rate of financial services CEOs leaving office was 17.2%— well above the 14.3% global average and significantly higher than the industry’s average turnover rate over the past decade. The rate of forced departures was also well above the norm (5.3% vs. 3.3%). Telecommunications stands apart from other industries in terms of its 10-year turnover rate (16.9% vs. 13.6% average), and its share of forced turnover (54%) — by far the highest of the 10 industries assessed, and the only industry in which forced turnover is greater than that of planned succession.
- In Russia, the most volatile industries are Power utilities and Oil & Gas. Those two industries had the highest succession rates in 2009 among the Top 100 companies in Russia, 30% and 15% respectively. Management turnover in power utilities sector was mainly due to power shifts while CEO changes in oil & gas companies were caused by holding groups’ thriving to secure management control over assets. CEO changes in metals & mining and industrial sectors resulted from weak financial performance. Consumer oriented companies looked for “turn around” agents to ensure business sustainability.
This study identified the world’s largest 2,500 largest public companies, defined by their market capitalizations (from Bloomberg) on January 1, 2009. 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 multi-language sources. 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 2009, Booz & Company used Bloomberg. Booz & Company also conducted supplemental research for regional CEO changes, including Russia. For the analysis in Russia a sample of 100 largest companies by revenue across 11 different industries was selected.