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
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
Write to Joann S. Lublin at