But the economic downturn has also had second-order effects on succession rates in this sector. In financial services, 19 percent of all turnovers were due to merger activity, compared with just 15 percent across all industries. In addition, government intervention has influenced the pattern of CEO appointments, triggering resignations at some banks and placements of new CEOs at others. Looking forward, we see the damage done to bank CEOs’ reputations being a significant factor in future succession rates. Many bank leaders have already been vilified in the press. The risk of legal action and increased scrutiny of executive remuneration may add to the pressure that CEOs in the financial-services industry face, and to the challenge that boards face in filling CEO positions.
The other hard-hit sector in terms of toppled chief executive talent this past year was energy. As in financial services, 18 percent of the CEOs at the energy companies in our study left office, and the rate of forced succession was 107.4 percent greater than the historical average. The energy industry suffered from the effects of enormous oil price volatility in 2008, the magnitude of which many companies had not anticipated. This industry had enjoyed the comfort of steady high returns for much of the 2000s, and is now, we hypothesize, bracing for a more uncomfortable few years.
Meanwhile, other industries demonstrated greater CEO stability in 2008. As one might expect, these are industries less sensitive to discretionary spending, such as industrials, utilities, and consumer staples. CEO dismissals in all three of these industries fell below historical rates.
A quick comparison of CEO turnover at consumer discretionary companies versus consumer staples companies, for example, highlights the “recession effect” we’ve hypothesized. The consumer discretionary sector (durable goods, automobiles, and entertainment) saw turnover rise to its second-highest level in the 11 years we’ve studied (though only 2.6 percent higher than its historical average). But turnover in the consumer staples sector (household, personal, and grocery products) dropped to a five-year low. Turnover in both industries was disproportionately high in North America, the region hardest hit by the recession in 2008.
In fact, if the two most volatile sectors (financial services and energy) are removed from our data set, the resulting CEO succession rate for 2008 is the lowest we’ve seen in five years. It seems that in most industries, the recession is viewed by boards as an externality, something beyond the active control of chief executives, and therefore not something for which they can or should be held accountable — at least not yet.
Regional Distinctions: Meeting in the Middle
Industry differences in CEO succession became more pronounced in 2008, but traditional regional differences began to blur. In certain key respects, Asian companies adopted practices more typically associated with their North American and European counterparts. Specifically, we are seeing a greater incidence of forced turnover in Japan and the rest of Asia.
Whereas turnover declined in the U.S. and Europe in 2008, it increased rather markedly in Japan (to 16.9 percent from 10.6 percent) and the rest of Asia (to 13.0 percent from 9.2 percent). However, the most pronounced escalation was in the rates of forced turnover, which nearly quadrupled in Japan, from 0.8 percent to 3.1 percent, and climbed from 3.8 percent to 6.1 percent in the rest of Asia. This is a departure from the norm in Japanese business culture, where forced turnover has historically been very low; in fact, with the exception of 2002, this is the highest rate of forced CEO turnover we’ve observed in Japan over the 11 years of our study. Planned successions in Japan and Asia were up substantially, perhaps a function of unwritten “term limits” in many Japanese companies. One factor that may be affecting the data is that Asian companies have been reporting more information about CEO succession recently, allowing our study to better capture whether departures are forced.