Among the specific findings for 2004:
• Underperformance — not ethics, not illegality, not power struggles — is the primary reason CEOs get fired. Forced turnovers are strongly correlated with poor shareholder returns. During the year before they left, dismissed CEOs had generated median regionally adjusted returns that were 7.7 percentage points lower than those who left office under normal conditions.
• New chief executives hired from the outside inherit companies in much worse shape than those inherited by insiders. For the CEO “class” of 2004, outsider CEOs began their tenures at companies whose performance, in the form of shareholder returns, was 5.2 percentage points lower during the preceding year than the performance of companies that promoted insiders.
• The CEO’s job is stressing even its hardiest denizens. An increasing proportion of successful chief executives age 55 or younger, especially in North America, are choosing to retire.
• The Sarbanes-Oxley Act (SOX) of 2002 did not force more CEO turnover in the U.S. The upward shift in CEO firings occurred from 1995 to 2000; subsequent rates of overall turnover, dismissals, and tenure are all consistent with pre-SOX trends.
• Europe and Asia (excluding Japan) have become the most demanding environments for CEOs. These regions have the highest overall turnover, the most firings, the shortest tenures, and the most rapidly increasing rates of turnover.
• The former CEO can be a real drag. Companies in which a retired chief executive stays on as chairman are more likely to underperform other firms.
• Successful companies are more likely to fire a new CEO. Contrary to conventional wisdom, companies that performed well during the two years prior to their CEO’s appointment have been one-third more likely to force that new CEO from office. Companies that struggled before their new CEOs came in were more likely to keep them longer.
Booz Allen studies CEO succession at the world’s largest companies to identify patterns in the relationship between the tenures of chief executives and the performance of their companies. Following the methodology used in previous years, we identified the chief executives at the 2,500 largest publicly traded companies in the world (based on market capitalization as of January 1, 2004) who left their positions during 2004. Using the companies’ public statements, as well as our review of press coverage, we determined whether a succession was voluntary or induced. (See “Methodology” at the end of this article.)
We used public data sources to help analyze these executives’ entire tenure as CEO, including personal demographic data (such as age at ascension and departure) and financial performance of their companies. In assessing performance over the CEO’s tenure, we measured total shareholder returns (TSR), including both stock price appreciation and dividends, and compared each individual company’s performance with the performance of a broad stock market index for the geographic region. Thus, our study reviewed the entire careers of CEOs at the point of their departures. We looked at such additional factors as whether the CEO was also chairman of the board, and whether he or she had previously served as CEO of another public company.
This year, we have expanded our data set to include the financial performance of companies in the years before each CEO assumed office. Our goal is to learn more about the circumstances under which boards turn to outsiders or insiders to run a company, and to understand more about the relationship between leadership characteristics and performance improvement in firms.
In our terminology, “regular” departures are all planned and long-scheduled retirements, as well as deaths. In 2004, regular departures occurred at a higher rate than ever before: 7.3 percent of the top 2,500 corporations. “Performance-related” departures are those in which the CEO was forced to resign, either because of poor performance or disagreements with the board. These too were higher than ever. The third category is “merger-driven,” when a CEO leaves after his or her company is acquired by or combined with another. At 2.4 percent, this was the only category to fall below its historical peak. (See Exhibit 1.)