As the worldwide economy recovers, the number of companies appointing new chief executives is on the rise. Just as the recovery has been unevenly distributed, however, so too are those new CEOs — not just geographically, but also in terms of their backgrounds and experience. More and more in the last several years, new chief executives are coming to their position from the outside, as boards of directors look for new blood from other companies and other industries, in hopes of introducing fresh thinking into their executive mix.
In 2011, the 12th consecutive year Booz & Company has been following the fortunes of CEOs at the world’s 2,500 largest public companies, 14.2 percent of those CEOs were replaced. Although that rate is sharply higher than the previous year’s turnover rate of 11.6 percent, it essentially represents a return to the seven-year historical average of just over 14 percent, and it is 1 percentage point higher than the overall 12-year average of 13.2 percent. (See Exhibit 1.) This recent return to form cannot be attributed to a single cause, but our analysis suggests that it is largely due to the improving economy in many parts of the world; turnover rates have typically been lower during periods of recession and significant stock market decline. This trend suggests that boards are more likely to keep their chief executive during times of economic uncertainty in order to maintain stability, and are more willing to make a leadership change when economic stability returns and the company outlook improves.
In recent years, to gain a better understanding of the evolving role of the CEO, we have focused on specific themes critical to that unique position. Two years ago, we looked at how the role changed over the decade of the 2000s, as tenures became shorter and more intense. Last year, we concentrated on how a company’s business portfolio and operating model affect the nature and duration of the CEO’s job. Given the increase in the succession rate among CEOs between 2010 and 2011, and the increase in the number of CEOs heading a company that is new to them, we chose this year to delve more deeply into the nature of the “incoming class” of CEOs — who they are, where they came from, and how they might best survive and thrive in that critical first year of their tenure.
To that end, in addition to our annual analysis of succession, we embarked on a detailed statistical analysis of first-year CEOs, and the results were intriguing. Outsiders, for example, accounted for 22 percent of all new CEOs in 2011, up from only 14 percent in 2007; at western European companies, 31 percent of new CEOs in 2011 were outsiders, compared with 22 percent at North American firms. We also interviewed 18 CEOs from around the world in order to gather their observations and suggestions on how to navigate a successful first year.
Of the overall 14.2 percentage rate for turnovers in 2011, 9.8 percent were planned, 2.2 percent were the result of the prior CEO’s dismissal, and 2.2 percent were the result of mergers or acquisitions. The data reveals differences in succession trends among companies of different sizes; differences in geographic areas, particularly in the way that mergers and acquisitions affect CEO turnover; and differences in the likelihood that companies will appoint a new chief executive from inside the company.
In 2011, the CEO turnover rate was highest among the 250 largest companies, as it has been, for the most part, since 2005. This trend has also been true over the past 12 years. On average, more than 14 percent of chief executives of the top 250 companies by market capitalization have turned over, compared with 12 percent of companies ranked 251 to 2,500 by market capitalization. (See Exhibit 2.) In addition, the boards of companies in these top tiers are more likely to dismiss (force out) their CEO. It seems that the bigger the company, the shorter the CEO’s tenure. Certainly, it is significantly harder — and more exhausting — to run a very large corporation than a smaller one; given that difficulty, it is not surprising that boards of big companies look more frequently for a new CEO.