The third boardroom expedient was to select a CEO who had previously served as the CEO of a publicly traded company. The proportion of experienced CEOs increased from about 4 percent in 1995 to about 6 percent in 2004 through 2006. The theory is that prior CEOs bring experience in dealing with investors and other stakeholders, giving them a head start. However, these CEOs delivered slightly worse returns to investors in eight of the nine years we studied; the advantages of experience must not be very great. We hypothesize that as boards observe that experience as a CEO doesn’t confer significant advantages, the proportion of prior CEOs will drop off. One piece of evidence consistent with our hypothesis is that the incidence of hiring a CEO from another large publicly traded corporation (one important subcategory of prior CEOs) declined significantly in 2006, after hitting highs in 2004 and 2005.
Today, aided by sweeping changes in governance law and regulation, boards do a good job of replacing CEOs who deliver poor returns to investors. The average tenure of chief executives forced from office over the nine years of our study was 7.1 years in North America and 5.2 years in Europe — long enough to develop and execute a strategy.
During the past three years, however, major investors have begun to demand more than accountability — they have been pushing for removal not only of CEOs who have been performing poorly but also of CEOs who aren’t expected to perform well in the future. In North America, several CEOs who had created above-average returns for investors in the past were forced out in 2006 because of concerns about their strategies or ability to deliver future returns. These included Jay Sidhu at Sovereign Bancorp and Martin McGuinn at the Mellon Financial Corporation.
This new activism fundamentally changes board dynamics. Boards and investors can assess past performance objectively, without a deep understanding of the company’s customers, technologies, and operations; five to seven years of poor performance is time enough to form a consensus about the need to replace the CEO. In contrast, assessing the company’s likely future performance is inherently subjective.
That subjectivity triggers increasing conflict within boards. Hedge funds and activist investment firms, as well as old-fashioned raiders like Carl Icahn, demand board seats, launch proxy battles, and mobilize shareholders to force strategic changes or oppose specific transactions. Private equity buyout firms offer a spike of immediate returns to current stockholders while capturing the long-term upside for themselves. Directors champion different strategies, sometimes provoking disagreements, such as the messy contretemps at Hewlett-Packard. And in some cases, especially in European companies in which unions hold seats on the supervisory board or government owns a major stake, other stakeholders are pushing back at strategies focused narrowly on increasing near-term shareholder value.
Globally, the proportion of CEOs leaving because of power struggles on the board increased from 2 percent in 1995 to 11 percent in 2004–06. In Europe, boardroom power struggles drove an extraordinary 22 percent of CEO departures in 2006. For example, Volkswagen CEO Bernd Pischetsrieder left amid conflict with supervisory board Chairman Ferdinand Piech and unions opposed to cost reduction initiatives. Jens Alder left Swisscom when the Swiss government hampered his efforts to use acquisitions to compensate for declining revenues in the home market. Autostrade CEO Vito Gamberale first supported, then opposed a merger with Abertis that was negotiated by Autostrade’s largest shareholder, the Benetton family. Autostrade and Gamberale parted ways in May 2006. Werner Seifert left Deutsche Borse after major shareholders repudiated his plan to merge with the London Stock Exchange.