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Published: May 25, 2010
 / Summer 2010 / Issue 59

 
 

CEO Succession 2000-2009: A Decade of Convergence and Compression

Matti Lievonen, president and CEO of Finnish oil refining and marketing company Neste Oil, agrees, as does Neil M. Kurtz, M.D., president and CEO of Golden Living, an elder care provider. “Coming in without baggage does help,” says Kurtz, although he’s quick to add, “When you come in from the outside, it’s very difficult to build trust.”

As for tenure, our 10-year perspective confirms that insiders tend to last a good two years longer in the chief executive suite than outsiders (7.9 years versus 6.0 years). Outsiders are also more likely to be forced out of office than insiders; that has been the case in nine of the past 10 years.

• Experience and stability in turbulent times. It’s no accident that planned successions have been increasing for the past three years on a global basis. (See Exhibit 1.) In a time of economic upset and severely clouded visibility, boards have been loath to make sudden moves.

But the preference for stability and experience predates the recession. Boards have long sought seasoned CEOs, and, indeed, the percentage of outgoing CEOs with prior CEO experience in a public company has trended upward, more than doubling over the past 10 years, although that trend may have peaked in 2007. (See Exhibit 6.)

Compression

This trend toward convergence and stability might suggest that the nature of the CEO’s job is getting easier — or at least less pressured. But that is not the case. There is a simultaneous wave of compression reshaping and refocusing the job itself. Today’s CEO has more to prove in less time, and increasingly lacks the additional authority of being chairman of the board.

• The rise of the CEO-only role. As we’ve observed, CEOs no longer typically also hold the chairman title. Less than 12 percent of incoming CEOs in 2009 were awarded the chairman title, versus 48 percent as recently as 2002. In effect, the CEO’s job is concentrated on running the company, while the separate chairman is in charge of running the board.

• The poor performance reality. CEOs forced from office have significantly underperformed those who leave on their own terms. (See Exhibit 7.) In other words, contrary to the perception one might get from many press accounts, the tolerance for poor performance has gone down, further increasing pressure on the chief executive to put an agenda in place and produce results.

• The short time to develop and implement an agenda. CEOs in the 21st century must set a course and demonstrate results more quickly than CEOs of a generation ago. Although tenures of 10 to 15 years were not unusual in the latter half of the 20th century, the global mean tenure of departing CEOs has dropped from 8.1 years to 6.3 years during the past decade. (See Exhibit 8.) CEOs are leaving office at about the same average age as they have historically, but they were older when they entered office: 53.2 years old in 2009 versus 50.2 in 2000.

Implications of Convergence and Compression

As corporate governance norms have converged across regions and industries, they have become more rigorous and more codified, as has the demand for greater transparency from both regulators and investors.

One implication for CEOs, and those who might be CEOs in the future, is that the CEO’s role has grown exponentially more complex and intense. Another is that the job is more difficult to sustain. Shorter tenures and the increased incidence of planned succession mean that new CEOs will typically have fewer years to drive their agenda.

A third implication is that the increasing tendency to split the job of the CEO and the chairman means that each will be held more accountable than in the past. For CEOs, now more transparently responsible for the company’s success, the pressure for performance is increasing, and the time for producing results has shortened. For the chairman, more transparently responsible for board governance, there is more of an imperative — though less time — to prepare for succession, and the stakes for finding the right CEO successor are higher. The superior performance of insiders confirms the value of consistently supported and carefully designed leadership development programs; companies that are forced to look for an outsider may expect to pay a price in future performance.

 
 
 
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Resources

  1. Corporate Leadership Council, “Creating Talent Champions, Volume I” (2008) and “Hallmarks of Leadership Success” (2003), Corporate Executive Board: The source of research on leadership development.
  2. Ken Favaro, Per-Ola Karlsson, Jon Katzenbach, and Gary Neilson, “Lessons from the Trenches for New CEOs: Separating Myths from Game Changers” (PDF) (Booz & Company, 2010): The practices that will substantially contribute to success for new CEOs.
  3. Per-Ola Karlsson and Gary Neilson, “CEO Succession 2008: Stability in the Storm,” s+b, Summer 2009: Last year’s study documented how the financial crisis had held down the rate of CEO turnover, except in hard-hit industries like financial services and energy.
  4. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/strategy_and_leadership.  
 
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