Although this reaction is not surprising, it is irrational. The returns investors receive from a stock reflect a combination of the overall trend of the stock market, unanticipated events in a particular industry, and the performance (and expectations for future performance) of the company. An individual CEO has almost no influence on the broad stock market, or on industrywide trends. Forced CEO turnover should relate only to the part of the returns unique to the company. But, in the U.S. at least, it doesn’t; CEO firings track the stock market returns of the company’s sector.
This conclusion is one of several this year that raise uncomfortable questions about the relationship between boards and management, for it indicates that directors are highly responsive to shareholder pressure about share prices, even if management is not solely responsible for the performance.
This is one of the reasons we don’t believe the low relative rate of overall CEO turnover in 2003 means boards have grown unresponsive to investor concerns. To the contrary, the data for 2003 shows that the long-term trend toward increasing forced turnover of CEOs in the U.S. is continuing. The rate of performance-related successions in 2003 was 130 percent higher than in 1995, and greater than in 1998 and 2001. Given the increased attention to governance issues, along with the effects of legal and regulatory changes, we expect to continue seeing performance-related successions higher than in the 1990s.
Europe’s Forcing Function
In Europe, forced succession of CEOs doesn’t fluctuate with broad returns on the stock market or with returns in an industry; only the company-specific element of returns matters. The better logic, though, hasn’t made CEOs there safer. Quite the opposite: In 2003, for the first time in our survey, both total CEO turnover and forced CEO turnover were higher in Europe than in North America.
During the past decade, European supervisory boards have become increasingly willing to replace CEOs for poor performance: The rate of forced turnover has more than quadrupled since 1995, when only 1 percent of European companies fired their chief executive or managing director (as the role is commonly titled at many European companies). Among European CEOs who left office during the last three years, only 40 percent achieved a regular retirement; 41 percent were removed forcibly, and 19 percent left after their company was acquired. A new European CEO must expect that he or she won’t enjoy a “normal” career end.
Consistent with the high rate of turnover, for the six years we studied, the average tenure of CEOs is lowest in Europe: only 6.5 years compared with 9.4 years in North America, 7.5 years in Japan, and 7.3 years in the rest of Asia. (See “CEO Demographics: The Sting of Youth,” below.)
CEO Demographics: The Sting of Youth
The folly of youth may reveal itself in the executive suite: The younger you are when you become a chief executive, the more likely you are to be fired from the job, according to our research. CEOs who were fired from their jobs in 2003 were, on average, 49.1 when they took office; those who retired on their own terms last year were, on average, 53.8 years old when they became chiefs. This gap has shown up in every year we have studied.
CEOs forced from office in 2003 were also younger than voluntary retirees when they left — another finding consistent with our past research. Globally, the mean age of a CEO forced from office in 2003 was only 55, whereas those with regular successions were, on average, 62.1. The "age gap" of 7.1 years is greater than it was in 2002, but still below the 9.5-year average gap for the other five years studied. The mean age of all CEOs who left office last year (59.5) was the highest we’ve seen since 1998 (60.4), but remains close to the mean age for the previous five years examined. Japanese CEOs remain the elder statesmen, with a mean age of 63.8 for departing chief executives last year.
Regionally, North American CEOs once again enjoyed the longest tenures in 2003 (8.4 years). The tenure for Japanese CEOs is 7.5 years, the mean for the previous five years studied. European tenures are the shortest, at 6.6 years. The average global tenure for the class of 2003, 7.6 years, is among the lowest we’ve seen since 1995. This suggests that shareholder activism, increased governmental oversight, and improved corporate governance have contributed to making the CEO’s job tougher and shorter in duration.