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 / Summer 2004 / Issue 35(originally published by Booz & Company)


CEO Succession 2003: The Perils of "Good" Governance

In Europe’s two largest economies, Germany and the United Kingdom, the rates of both total CEO turnover and forced CEO turnover were higher still. In 2003, forced turnover at large public companies in the U.K. reached 6.5 percent, and, in Germany, it reached an extraordinary 8.1 percent — the highest level of forced turnover in a large country in any year that we’ve studied. Contributing to German forced turnover was the dismissal of several long-standing yet underperforming CEOs, such as MG Technologies’ Karl-Josef Neukirchen. Our hypothesis is that, with so much forced turnover in 2003, both Germany — and Europe in total — will experience somewhat lower forced turnover in 2004. That would continue a seesaw pattern we have been seeing in all three of our study’s major regions, with a year of above-average forced turnover rates followed by a year of firings below average levels.

In Europe, at least three trends are focusing shareholders’ and regulators’ attention on corporate governance issues: growing public ownership of stocks, in part because of the privatization of former state-owned enterprises; the need by non-U.S. companies whose shares are traded in the United States to meet Sarbanes-Oxley’s compliance requirements; and the development of new European Union regulations regarding board composition and disclosure. It’s no surprise, then, that the pressure on Europe’s chief executives is rising.

The Asian Exception
In contrast to North America and Europe, Japan experienced only a 0.6 percent rate of forced turnover in 2003, even lower than its historical average. Last year, assessing Japan’s 2002 spike to a forced turnover rate of 3.3 percent, we recognized that many of the forced successions were triggered by scandals, but speculated that the change was more likely “due to the region’s gradual transition to Western-style governance procedures.” Although governance reforms — including important regulatory changes — continue to be enacted in Japan, we did not see those changes reflected in management suites last year.

Much of the persistent difference, though, is probably due to Japan’s unique leadership model for large corporations. Forced turnover is simply a less important management tool, because the Japanese system emphasizes long development periods to train internal CEO candidates, who subsequently serve relatively short terms in office. Japanese CEOs are 58.4 years old on average when they take office, compared with 50 years in Europe and 49.1 in the United States. And Japanese CEOs, most of whom retire voluntarily, serve an average of 7.5 years in office, less than the 7.6 year global average we saw in 2003 and the 8.2 year global average across the six years we have studied. Without forced turnover, underperforming CEOs in North America and Europe might remain in office far too long. But in Japan, normal retirement addresses most instances of poor performance. (The lower rate of forced turnover in Japan doesn’t mean that shareholders’ interests are ignored. Those Japanese CEOs who were forced to resign produced average annual returns 4 percentage points lower than those who achieved a normal retirement.)

In contrast to Japan, other Asia/Pacific countries take a high-risk, high-variance approach to leadership. CEOs take office at the youngest age of any region — 47.4 years. Although CEOs who perform well remain in office for 11.5 years, poor performers are fired after only 4.3 years. Over the six years studied, firing of CEOs is most prevalent in Asia/Pacific: 46 percent of departing CEOs were fired, whereas only 34 percent achieved a normal retirement. The remaining 20 percent lost their jobs following a merger.

Chairman and/or CEO
Separating the roles of CEO and chairman of the board has become a major objective in the U.S. among corporate governance activists, many of whom aver that combining the positions gives one individual too much power and too little accountability for results. The campaign appears to be picking up steam; six companies — Ameren Corporation, Bed Bath & Beyond Inc., the Charles Schwab Corporation, Clorox Company, Freeport-McMoRan Copper & Gold Inc., and Hasbro Inc. — separated the roles for governance reasons in 2003. Observing the growing pressure, we gathered new information this year to determine whether departing CEOs were also chairmen, and at what point in their careers they took on the role. Combining the data for all six years and all regions, we were surprised to find that the “imperial CEO” by and large doesn’t exist: More than half the departing CEOs — about 58 percent — did not hold the title of chairman, and just 21 percent carried both titles throughout their tenure. (The remaining 21 percent picked up the chairman’s role after serving for some period solely as chief executive.)

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  1. Paul F. Kocourek, Christian Burger, and Bill Birchard, “Corporate Governance: Hard Facts about Soft Behaviors,” s+b, Spring 2003; Click here. 
  2. Chuck Lucier, Eric Spiegel, and Rob Schuyt, “Why CEOs Fall: The Causes and Consequences of Turnover at the Top,” s+b, Third Quarter 2002; Click here. 
  3. Chuck Lucier, Eric Spiegel, and Rob Schuyt, “CEO Succession 2002: Deliver or Depart,” s+b, Summer 2003; Click here.
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