These and our other findings about CEO succession in 2003 depict a corporate marketplace rocked by disequilibrium. In its singular emphasis on the removal of underperforming CEOs, the governance movement risks overlooking the vital roles played by boards and management in developing viable successors and fostering superior returns. The return of growth to the top of the corporate agenda makes resolution of the governance paradox more critical than ever. Consistent, unified leadership — from both managers and directors, and cascaded through the entire organization — is required to execute the myriad elements of a growth program: productively integrating major acquisitions, improving the time-to-market and quality of new products and services, placing large bets on new strategic directions, and more. That’s hard for companies to do when CEOs are consumed with compliance and the prospect of imminent dismissal.
The Top 2,500
Booz Allen Hamilton’s annual study of CEO succession aims to identify patterns in the relationship between chief executive officer tenure and corporate performance that can provide insights for managers, board members, and their advisors. Following the methodology used in previous years, we identified chief executives at the 2,500 largest publicly traded companies in the world (based on market capitalization as of January 1, 2003) who left their positions during 2003. Using the companies’ public statements, as well as our review of press coverage, we determined whether a succession was voluntary or induced.
We used public data sources to help analyze these executives’ entire tenure as CEOs, including personal demographic data (such as age at ascension and departure) and the financial performance of the companies.
In assessing performance, we measure total shareholder returns (TSR), including dividend reinvestments, and compare individual company performance with regional industry performance for the period of a CEO’s tenure. A shareholder return of 1 percent therefore means that the CEO class in question — retiring outsiders, for example — delivered TSR 1 percentage point greater than the entire relevant market. (See “Methodology,” at the end of this article.)
Thus, our study reviews the entire careers of CEOs at the point of their departure. In effect, we look back on the professional lives of each year’s “graduating class” of CEOs, and, in the aggregate, try to determine factors that contribute to the success of some and the failure of others. To tease out information that might illuminate the relationship among boards, management, and corporate performance, this year, for the first time, we included data about whether CEOs held the title of chairman of the board throughout their tenure; whether they were named chairman during the course of their service; or whether they never held the title.
That vein of research is important because of the continuing, unrelenting scrutiny of corporate governance practices around the world. Criminal trials of former CEOs and board members accused of fraud, larceny, and other crimes at Enron, Tyco, WorldCom, and Martha Stewart Living Omnimedia dominated business-news coverage for much of the year. New scandals were uncovered — notably in Europe, where malfeasance was found at the Italian food company Parmalat. The implementation of the Sarbanes-Oxley Act in the U.S. in 2003 resulted in significant changes in the composition and charters of boards. New regulatory initiatives were unveiled, including a proposed epoch-making change in Securities and Exchange Commission rules that could allow shareholders to directly nominate candidates for boards of directors.
The long-term trend in CEO turnover reinforces the main conclusion reached in our previous succession studies: Aggressive shareholder capitalism has become the defining characteristic of 21st-century capitalism. The days when investors “hired” professional managers to run the firm and left it to the board of directors to oversee them — the de facto corporate governance model for much of the 20th century — now seem to be gone for good. As the era of managerial capitalism wanes, we are entering a new, unfamiliar period, in which CEOs and boards are scrutinized intensely not only by shareholders, but by regulators, politicians, and the legal system as well. Moreover, they are being held to account for more than financial performance; increasingly, the specific decisions they make on the job are being second-guessed. The Walt Disney Company’s choice not to renew its distribution relationship with another film company provided support for a shareholder revolt that stripped Disney’s chief executive, Michael Eisner, of the chairmanship; in Germany, Josef Ackermann, the CEO of Deutsche Bank AG, was tried on charges that, as head of Mannesmann’s supervisory board, he approved overly generous separation payments for top executives.