AUSWR
The Association of U S West Retirees
 

 

 

CEO Security: No Replacements
Lack of Deep Bench Can Help Preserve Poor Performers
By Joann S. Lublin
The Wall Street Journal
Tuesday, May 27, 2008

Fewer big-company chief executives are leaving their posts, and CEOs face little risk of dismissal even after two years of poor shareholder returns, according to a new study.

The Booz & Co. analysis, slated for release Tuesday, suggests that corporate directors often hesitate to oust a weak leader because they lack an internal replacement, a finding that may further pressure boards to bolster management-succession planning.

Booz, a management consultancy, scrutinized CEO changes and total shareholder returns for the world's 2,500 largest publicly traded companies as measured by market capitalization in 1995, 1998, and 2000 to 2007.  Global management turnover declined last year for the second consecutive year to 13.8% from 14.3%;  it hit a high of 15.4% in 2005.  CEOs who left last year had served a median of six years.

While fewer CEOs are leaving, more of them are being forced out of their posts.  Booz said 4.2% of CEOs world-wide were forced out last year.  That is slightly above the 3.8% average for this decade, and up dramatically from the 1.1% to 2% annual rates in the 1990s, according to the report.

But even poor performers still have considerable job security.  CEOs whose shareholder returns fell 25% while significantly underperforming peers over two years had a 5.7% chance of being ousted the following year.

"Corporate boards are not forcing out CEOs who are delivering substandard performance for shareholders," the study said.  Amid mounting investor pressure for short-term results, this finding "was a surprise," said Gary L. Neilson, a Booz senior vice president and one of the report's three authors.

The conclusion didn't surprise some succession specialists, however.  "Boards don't jump to pull the trigger" over short-term returns as long as directors understand a company's strategy, major issues and industry, observed David Nadler, a senior partner at Oliver Wyman Consulting in New York.

Messrs. Nadler and Neilson both said more CEOs would be fired for poor short-term returns if boards did a better job of succession planning.  Directors without an obvious replacement for their CEO often tell Mr. Nadler, "We'll live with what we have and hope things get better."

In another sign of insufficient succession planning, the Booz study found that North American and European boards keep hiring outsiders as CEOs "even though they consistently underperform CEOs who rose through the ranks."  Outsiders also tend to step down sooner than insiders.  For the years covered by the analysis, about 20% of the CEOs hired were outsiders.

The study suggested that boards could improve their selection of future chief executives through a comprehensive approach of identifying future leaders, giving them varied experience and moving them up through the organization.

Other factors also may influence the job security of global chief executives, the report said.  CEOs who are also chairmen of the board are less likely to be ousted, the study found.  And boardroom disputes and power struggles accounted for more than one-third of CEO dismissals since 2004, up from less than one-fourth in prior years.  Researchers used news accounts and other outside sources to categorize boardroom disputes, and excluded financial-performance disagreements.

Write to Joann S. Lublin at joann.lublin@wsj.com

http://online.wsj.com/article/SB121185884636621997.html?mod=us_business_whats_news