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


CEO Succession 2003: The Perils of "Good" Governance

The revolving-door problem appears to be particularly acute in Europe. At first glance, the high rate of forced, performance-based turnover of CEOs among European companies appears to indicate that these firms have internalized good-governance messages and methodologies. But when seemingly disconnected bits of data are put together, the picture is less flattering. Our research shows that European companies have a higher proportion of outsider CEOs than companies in other regions, that these CEOs’ performances are worse than those of insiders, and that they stand a higher likelihood of being fired.

That the governance “conversation” needs to shift is supported further by clear evidence that boards aren’t effectively playing their roles in succession and in helping to ensure long-term success. The increasing reliance on outsiders and prior CEOs, despite data showing that they deliver poor performance for investors, suggests that a more effective process to develop inside CEO candidates could improve returns to investors.

More robust pools of internal candidates might also help slow the rise in CEO compensation. Increasing use of outsiders and the recycling of former CEOs — especially in the United States — suggest that across the economy, demand for viable CEO candidates exceeds supply. Increasing the supply to match or even exceed demand should moderate CEO compensation — and, as our evidence shows, it will probably increase shareholder returns.

But directors’ responsibility extends beyond the succession process itself. One of our most consistent findings, year after year, is that CEOs generate better returns for investors in the first half of their tenures than in the second half. Across the six years we studied, first-half returns are 5.5 percentage points per year better in North America and 7.3 percentage points better in Europe. Evidently, boards do an excellent job selecting a CEO to meet immediate challenges, but they are much less effective in helping the CEO sustain superior long-term performance. Improving second-half performance would yield a big payoff for investors.

The challenge for boards and regulators alike is to ensure balance across the four roles. In our view, governance reform must pay significantly greater attention to the development of viable internal successors and to more effective partnering between the board and management to deliver sustained long-term performance. These roles are the next frontier in improved performance for investors.


This study required the identification of the world’s 2,500 largest public companies, defined by their market capitalization on January 1, 2003. We use market capitalization rather than revenues because of the different ways financial companies recognize and account for revenues. The Compustat/Global Vantage database of public companies provided a ranking of all publicly traded companies on December 31, 2002.

To identify the companies among the top 2,500 that had experienced a chief executive succession event, we used a file of executive changes provided by idEXEC (a global business-to-business contact database of executive decision makers). We also used a variety of printed and electronic sources, including Corporate Yellow Book and Financial Yellow Book (both published by Leadership Directories, N.Y.); Fortune; the Financial Times; the Wall Street Journal, and several Web sites containing information on CEO changes (,, and Additionally, we conducted electronic searches using Factiva for any announcements of retirements or new appointments of chief executives, presidents, managing directors, and chairmen; results of this search were compared to the list of top 2,500 companies. For firms that had been acquired or merged in 2003, we used Bloomberg. Finally, we consulted the marketing personnel of Booz Allen Hamilton offices outside the U.S. to add any CEO changes in their regions that had not been identified. Our historical database of past CEO changes has been greatly enhanced this year thanks to improved local-language research, particularly in Japan.

Each company that appeared to have experienced a CEO change was then investigated for confirmation that a change had occurred in 2003 and for identification of the outgoing executive: title(s) upon succession, starting and ending dates of tenure as chief executive, age, education, whether he or she was an insider or outsider immediately prior to the start of tenure, whether he or she had served as a CEO of a public company elsewhere prior to this tenure, whether the CEO had been chairman and, if so, for how long, and the true reason for the succession event. Company-provided information was acceptable for each of these data elements except for the reason for the succession; an outside press report was necessary to confirm the true reason for an executive’s departure. We used a variety of online sources to collect this information on each CEO’s tenure, including company Web sites, the Factiva database,, and proxy statements available on the U.S. Securities and Exchange Commission’s (SEC’s) EDGAR database (for U.S.-traded securities). In some cases, when the online sources were unproductive, we contacted the individual companies by e-mail and telephone to confirm the tenure information. We also enlisted the assistance of Booz Allen offices worldwide as part of this effort to learn the reasons for specific CEO changes in their regions.

We then calculated average growth rates (AGRs for total tenure, first half, and second half) for two types of financial and shareholder information for each executive’s tenure: net income and total shareholder return (TSR, including the reinvestment of dividends, if any). Net income data was provided by S&P (Custom Projects); quarterly data was provided for North American–traded securities, and annual data was provided for other firms. To enable meaningful cross-industry comparisons, we also collected the income data information for the relevant industry and region (e.g., industrials in North America, Europe, Japan, rest of Asia/Pacific, South America, or Middle East/Africa) and subtracted the regional industry income growth from the company’s average growth in the same period. TSR data was provided by Thomson Financial Datastream. We calculated regionally adjusted TSR AGRs by subtracting the Morgan Stanley regional shareholder return indices from the company’s performance during the periods in question.

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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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