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Published: May 24, 2012
 / Summer 2012 / Issue 67

 
 

CEO Succession 2011: The New CEO’s First Year

We found that the level of M&A-driven successions within each market-cap tier has a significant effect on the rate at which new CEOs are brought in. As you would expect, smaller companies — those ranked in the 501 to 2,500 market capitalization range — are more affected by M&A-related turnover. Certainly, larger companies don’t merge or get acquired at as high a rate as their smaller counterparts, although their CEOs are under considerably greater governance pressure.

On an industry basis, last year, CEO succession events were most common in the energy sector, in which 19 percent of chief executives were replaced through either a planned or a forced event. Energy was followed closely by telecommunications and utilities, and successions were rarest among CEOs at diversified companies, where just 6 percent left. This should come as no surprise, because turnover rates have been consistently highest in the energy, telecom, and utilities industries over the past 12 years — all industries that have been subject to disruptive market forces. (See Exhibit 3.)

This Year’s Incoming Class

The overall trends last year in how public companies handled the transition to new top management, and the big increase in the number of new CEOs, may suggest that boards are increasingly seeking new leaders to help drive growth in a recovering global economy. If that is the case, however, it places a distinct — and arguably greater — burden on those newly elevated CEOs to prove themselves early in their tenure. The makeup of the 2011 class of incoming CEOs evolved in several ways in response to such pressures.

First of all, insider CEOs (those who came up through the ranks of the companies they now lead) continue to account for the lion’s share of CEO successions — which is understandable, given that insiders perform better than outsiders. Nevertheless, the percentage of insiders has been on the decline, as more and more companies turn to outsiders for their chief executives. In 2007, just 14 percent of CEOs came from outside their new company (one of the lower levels we have seen); last year, that number was 22 percent. This trend suggests that boards are putting more weight on CEO experience than they did before. Perhaps this is because more companies are making a real effort to shake up their culture at the senior executive level and are thus seeking CEOs with experience in other industries and other regions. It may also be that as companies increasingly set their sights on new markets around the globe, they discover that their insider candidates lack the experience necessary to carry them forward into unfamiliar territory. Moreover, boards appear to be taking seriously their fiduciary responsibility to cast their net beyond the usual pool of internal candidates. Whether these two countervailing trends — better-performing insiders and increasing numbers of outsiders — continue in the future will bear watching.

Additionally, although companies in western Europe hired new CEOs at just a slightly higher rate than did companies in the U.S. and Canada, the proportion of outsiders appointed as chief executives was significantly greater among western European companies than among companies based in North America — 25 percent and 18 percent, respectively, on average, over the past five years. This trend may suggest a growing disparity in governance philosophies between the two geographies. At the same time, we have observed over the past 12 years that U.S. and Canadian insider CEOs typically have served a longer term in office than their western European counterparts, but that the gap is narrowing — from three years in 2000–02 down to one year in 2009–11. (See Exhibit 4.)

 
 
 
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Resources

  1. Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “The Four Types of CEOs,” s+b, Summer 2011: Last year’s study suggested that the nature of the CEO’s job varies with the role of the corporate core — and that the more involved headquarters is in operational decision making in any given company, the more fragile the CEO’s tenure is likely to be.
  2. Ken Favaro, Per-Ola Karlsson, Jon Katzenbach, and Gary L. Neilson, “Lessons from the Trenches for New CEOs: Separating Myths from Game Changers,” Booz & Company white paper, January 2010: The practices that will substantially contribute to success for new CEOs.
  3. Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “CEO Succession 2000–2009: A Decade of Convergence and Compression,” s+b, Summer 2010: This study documented a decade’s worth of CEO succession trends and noted how governance norms are converging and the job of the CEO is compressing, in terms of both tenure and capacity.
  4. Gary L. Neilson and Julie Wulf, “How Many Direct Reports?Harvard Business Review, April 2012: An author of this article and a Harvard Business School professor discuss why the CEO’s average span of control, measured by the number of direct reports, has doubled, rising from about five in the mid-1980s to almost 10 in the mid-2000s.
  5. For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership and the Booz & Company website at: booz.com/global/home/what_we_think/featured_content/ceo_succession.