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Published: May 23, 2005

 
 

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

Globally, outsider CEOs inherit companies in much worse shape than insiders do. For CEOs leaving office in 2004, those who were outsiders when beginning their tenures took over companies whose performance was 5.2 percentage points lower during the preceding year than that of those companies taken over by insiders. Particularly in North America, and in Europe to a lesser extent, inside candidates were more likely to become CEO of companies that had been doing well, whereas outsiders were more prevalent at companies that had been performing poorly. This makes perfect sense: Outsiders are generally perceived to be better prepared to make the fundamental changes in direction required; outsiders may bring the skills or the fresh vision the company needs, and because of the company’s poor performance, the board may be skeptical of the capabilities of internal candidates.

Dread and Hope
“A man awaits his end, dreading and hoping all,” wrote the Irish poet William Butler Yeats. Certainly, for contemporary chief executives facing tenures that are increasingly short and increasingly likely to end in a dismissal, there is more than enough dread to go around.

But our research shows that there also is hope, and we would like to offer some guidance to CEOs and the boards that hire them:

• Work on your timing. Many boards of directors continue to do a bad job of replacing underperforming CEOs. Boards in Europe seem to be wielding the ax too quickly, whereas those in North America are not acting quickly enough. The persistent global trend of CEOs delivering inferior returns during the second half of their tenures shows that one of the main shortcomings of boards is their inability either to ease out underperformers at the right time — or, more importantly, to aid them when they need help.

• Strengthen succession planning. Boards — and CEOs themselves — are still not grooming future candidates for the chief executive position effectively, as evidenced by the increasing proclivity to hire outsiders and former chief executives of other companies, despite little long-term evidence that these candidates will perform better as CEOs. Our colleague DeAnne Aguirre, a senior vice president in Booz Allen Hamilton’s San Francisco office, observes that the pressure on CEOs to deliver results is causing many to fail to mentor and develop future leaders. “The whole philosophy of success through the success of others,” she notes, “seems to have been forgotten.” The expertise of McDonald’s, which lost two CEOs to untimely deaths during one year, is instructive: The fast-food company had candidates at the ready to replace James Cantalupo, who died in April 2004, and Charles Bell, who died in January 2005, and lost little business momentum despite the tragedies.

• Silver bullets are no better than golden parachutes. Many governance activists have made the separation of the chairman and chief executive roles the sine qua non of good governance. Our data demonstrates that, far from being a panacea, the separation of roles can actually harm shareholder value, especially in the case where the chairmanship is retained by the former CEO. In many companies, particularly in North America, chairmen/CEOs have continually delivered above-average performance over extended periods of time.

• Resist uneducated “activism.” The most pernicious implication of our study’s results is that shareholder activism is creating an unintended consequence: an even greater likelihood that executives will focus on delivering short-term results at the expense of strategies that create long-term shareholder value. Europe is a case in point. Knowing that underperformance is likely to lead to dismissal in a mere two and a half years, how can one assume that a new CEO will spend much time worrying about the company’s long-term outlook? Booz Allen’s Klaus-Peter Gushurst suggests that new chief executives should be given four to seven years to prove themselves, particularly in countries like Germany or France where change requires enlisting stakeholders, such as government regulators and labor unions. “When a CEO is forced out after two or three years,” says Dr. Gushurst, “that is usually a sign that the supervisory board didn’t pay enough attention at the time the individual was hired.”

 
 
 
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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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