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 / Summer 2006 / Issue 43(originally published by Booz & Company)


CEO Succession 2005: The Crest of the Wave

Among the specific findings for 2005:

  • Governance reforms are working. Boards of directors have become more responsive to shareholder and regulatory pressure, and are more proactive in ousting underperforming CEOs. Of companies worldwide, 15.3 percent (or more than one in seven) replaced its chief executive in 2005. This is the highest level in the eight years we’ve studied and 70 percent higher than in 1995. We believe this turnover level will endure.
  • CEOs are as likely to leave prematurely as to retire normally. Continuing a pattern from 2004, in 2005 nearly half of all CEO departures were due to poor performance or mergers.
  • “Repeat chiefs” are increasingly common. More than one in eight of the CEOs who left office this year had previously served as leader of another company; increasingly, active CEOs are moving directly from one large company to another, a phenomenon we call “beggar thy neighbor.”
  • Outsider CEOs flame, then fizzle. During their first two years in office, CEOs brought in from outside the company produce returns for investors that are nearly four times better than those achieved by insiders. But when the tenure grows longer, insider CEOs tend to do much better. One implication: Companies that hire outsiders should follow a “five-year rule,” seeking a new CEO before performance declines.
  • Nonchairman CEOs are now the best performers. Of CEOs who left office in 2005, those who never served as chairman of their companies outperformed those who served in the dual role of chairman and chief. In North America over the last three years, nonchairman CEOs produced shareholder returns three times as high as those of CEO/chairmen.
  • The former CEO should not remain as chairman. CEOs who serve in an “apprenticeship” model, in which the chairman is their predecessor, generally do poorly. For example, in Europe over the last four years, “apprentice” CEOs produced annual shareholder returns that were 5 percentage points lower than the returns achieved by departing CEOs who had had separate and independent chairmen to work with.
  • In 2005, North America experienced a record level of performance-related turnover, with 35 percent of all departing CEOs forced out. Europe and the Asia/Pacific region (not including Japan) saw declines from their record turnover levels of 2004, which had been triggered by rapid departures of newly hired chief executives.
  • Troubled companies look for outsiders, who don’t necessarily succeed. Among the CEOs who left office in 2005, those who had been hired from outside had taken charge of companies with, on average, far worse performance records than those who had been promoted from within. In North America, for example, 29 percent of the companies with negative performance in the prior two years had hired an outsider versus only 6 percent of positively performing companies.

The New Normal
Booz Allen’s annual study of CEO succession has tracked the rates of global CEO turnover for 1995, 1998, and each year from 2000 to 2005. We identify chief executives at the 2,500 largest publicly traded companies in the world (based on market capitalization as of January 1) who left their positions during the year. Using press reports, public filings, and the companies’ public statements, we classify each departure in one of three categories. First are the “regular” successions, unrelated to the CEO’s perceived on-the-job performance. These include planned departures, long-scheduled retirements, moves to a larger public company, and deaths. Second are the “performance-related” successions, in which the CEO was forced to resign, because of either poor performance or disagreements with the board. The third category is “merger-driven,” in which a CEO resigns or retires after his or her company is acquired by or combined with another. We use public data sources to help us analyze these executives’ tenures as CEOs, including personal demographic data (such as age at ascension and departure) and financial performance of the companies.

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  1. Rakesh Khurana and Katharina Pick, “The Social Nature of Boards,” Brooklyn Law Review, vol. 70, no. 4, Summer 2005: Unearths the relationship between board makeup and succession decisions.
  2. Chuck Lucier, Rob Schuyt, and Edward Tse, “CEO Succession 2004: The World’s Most Prominent Temp Workers,” s+b, Summer 2005: Last year’s study foreshadowed the “era of the short-term chief.” Click here.
  3. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
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