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Published: May 23, 2005

 
 

CEO Succession 2004: The World’s Most Prominent Temp Workers

In Japan, both performance-related and merger-driven turnover increased in 2004, a finding consistent with the hypothesis we offered two years ago that Japan is gradually making a transition to a Western-style governance model. At the same time, turnover rates in Japan are skewed by the traditional system for selecting CEOs, which emphasizes the long-term development of internal candidates who assume office at an advanced age (averaging 59.4 years in 2004), with only a limited time remaining until retirement. Even successful CEOs in Japan served an average of only 6.3 years, only slightly longer than the 5.2 years of unsuccessful North American CEOs.

In North America, CEO turnover in 2004 was consistent with the hypothesis that we advanced in two previous CEO studies: Turnover is stable, with planned successions and performance-related dismissals fluctuating around an annual average of 6 percent and 4 percent, respectively. Merger-related turnover is cyclical: In 2004, it stood at 2.8 percent, near the average we’ve seen across all years of our study. We expect it to increase, though. So far in 2005, major deals, such as Procter & Gamble’s purchase of Gillette, have propelled the value of mergers and acquisitions to their highest levels since late 2000, according to Bloomberg Business News.

The Sarbanes-Oxley Act isn’t yet affecting CEO turnover in the United States. Boards of directors in North America had already become more interventionist prior to SOX’s passage. The major governance changes imposed by the law, such as more independent directors and more power for board members and committees, may already be reflected in boardroom practice. We probably won’t be able to meaningfully assess SOX’s impact for another two years at least, when the first wave of poorly performing CEOs selected after the law’s enactment are forced from office.

Healthy Turnover Rates
As more chief executives retire prematurely or are pushed from office, one question arises: Are CEOs being scapegoated to such an extent that it is economically harmful?

One benchmark for CEO turnover is the normal attrition rate for all employees. According to quarterly surveys by the research publisher BNA Inc., the typical employee turnover rate in the United States is about 12 percent per year (excluding layoffs and temporary employees). The total rate of CEO turnover in 2004 is comparable to this overall rate of employee turnover, with the U.S. near the low end of the range and Europe near the high end. At least from the perspective of turnover, the CEO is just another employee.

As the demise of lifetime employment increases job-hopping among employees, more performance-related turnover of CEOs is increasing the rate of “CEO-hopping.” Thirteen percent of the CEOs who left office in 2004 had previously served as the CEO of a publicly traded corporation (either a different one or the same one), by far the highest rate in the seven years we’ve studied. CEO-hopping takes a variety of forms. Sometimes a current CEO is hired away, as Hewlett-Packard hired Mark Hurd from NCR. Sometimes a CEO who has left one company is hired by another, as was the case when Snap-on Inc. hired Jack Michaels, former CEO of the furniture company HNI. Sometimes a former CEO becomes the CEO again, as Charles Schwab reacquired the CEO title of the company that bears his name. There probably will always be loyal employees who get gold watches after 50 years of service, as there probably will be chief executives who rule with iron fists for decades. But there are likely to be fewer and fewer in each category.

The similarity between total employee turnover and CEO turnover implies a duality in the CEO’s job. On the one hand, the CEO is seen as “the boss,” setting the company’s direction, making the most important decisions, and hiring and firing people at all levels. And the CEO personifies the company, leading the company’s culture and serving as the spokesperson to stakeholder constituencies. But on the other hand, the CEO role is increasingly seen as an employee position, however highly compensated, visible, and strategically focused it may be. As long as the board resists the temptation to tinker with managerial decisions and to undermine the authority of the CEO, the duality needn’t be any more of a problem than that faced by a politician: supreme while in office but subject to removal at the next election.

 
 
 
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Resources

  1. Ram Charan, “Boardroom Supports,” s+b, Winter 2003; Click here. 
  2. Chuck Lucier, Rob Schuyt, and Junichi Handa, “CEO Succession 2003: The Perils of ‘Good’ Governance, s+b, Summer 2004; Click here. 
  3. Michael Schrage, “Ira M. Millstein: The Thought Leader Interview,” s+b, Spring 2005; Click here. 
  4. Ira M. Millstein and Paul W. MacAvoy, The Recurrent Crisis in Corporate Governance (Palgrave Macmillan, 2004)
  5. Corporate Governance Alliance Digest, edited by Eleanor Bloxham; Click here.
 
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