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 / Third Quarter 2002 / Issue 28(originally published by Booz & Company)


Why CEOs Fall: The Causes and Consequences of Turnover at the Top

An exclusive study of the world’s 2,500 largest companies shows CEO succession has increased by 53 percent in just the last six years. The reason: shareholders want returns now.

Jack Welch of GE, Enrico Bondi of Montedison, UBS’s Luqman Arnold, Yoshikazu Hanawa of Nissan, Yoichiro Kaizaki of Bridgestone, and both Ken Lay and Jeff Skilling of Enron were among the 231 chief executive officers of the world’s 2,500 largest publicly traded corporations who left office during 2001. Their departures prompted, in no particular order, effusive eulogies, columns of news, best-selling books, endless speculation, and continuing investigations. And no wonder: CEOs are the emperors of global business, overseeing the working lives of millions of men and women, and guiding hundreds of billions of dollars of shareholders’ capital. With the daily routines and the future well-being of so many people dependent on the leadership of CEOs, we understandably celebrate their successes, rue their mistakes, and pay almost obsessive attention to their fates.

Despite the many well-researched articles about individual chief executive officers, there have been no systematic studies of the impact on CEOs’ careers of the tectonic shifts in global business, such as rising shareholder activism and changing corporate governance. Although the performance of chief executives has been the subject of extensive research, much of that research has focused on performance relative to compensation. Little if anything is available that charts relationships among CEO tenure, CEO demographics, and corporate performance. And nothing compares trends in these areas across geographies or industries.

To bridge this critical knowledge gap, Booz Allen Hamilton recently concluded what we believe to be the most comprehensive study ever done of the careers of global chief executive officers. For the 2,500 publicly traded corporations with the largest market capitalizations in the world on January 1, 2001, we identified all the chief executives who completed their stewardship during 2001 — the departing class of 2001. We analyzed these executives’ entire tenures as CEOs, including not only personal demographic data, such as age at ascension and departure, but also the financial performance of their companies, measured by net income growth and total returns to shareholders. To provide historical context, we also identified and analyzed the departing CEO classes of 1995, 1998, and 2000, focusing on the 2,500 largest companies in each given year.

Our data demonstrates that shareholder activism and changes in corporate governance have transformed the CEO’s world, especially in Europe and North America. For example, from 1995 to 2001:

  • Turnover of the CEOs of major corporations increased by 53 percent.
  • The number of CEOs departing because of the company’s poor financial performance increased by 130 percent.
  • The average tenure of CEOs declined from 9.5 years to 7.3 years.

The premature departure of a CEO — a “retirement” that, however described, is not voluntary, and that in years past befell only the unlucky or ineffective — is no longer an exceptional event, but the rule. Of the CEOs who departed in 1995, 72 percent either died in office or retired, with thanks from their boards, according to a public schedule. In 2001, only 47 percent of corporate chiefs achieved such regular transitions. The “new normal” is an early departure for the CEO, either because of performance or because of a merger. Today’s CEOs are like professional athletes — young people with short, well-compensated careers that continue only as long as they perform at exceptional levels.

In addition, we found significant and surprising differences among geographic regions. In Europe, where corporate chiefs are presumed to be more protected by intimate relationships among senior management, boards, governments, and financial institutions, CEOs are actually most at risk. In the Asia/Pacific region, where such relationships also are presumed to exist, changes in CEO careers and CEO turnover have been minimal.

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  1. Anthony Bianco and Louis Lavelle, “The CEO Trap,” Business Week, December 11, 2000; Click here.
  2. Jay Dahya, John McConnell, and N.G. Travlos, “The Cadbury Committee, Corporate Performance, and Top Management Turnover,” Journal of Finance, February 2002
  3. Pamela Mendels, “The Real Cost of Firing a CEO,” Chief Executive, April 2002; Click here.
  4. Jay Dahya and John McConnell, Outside Directors and Corporate Board Decisions, Krannert School of Management, Purdue University, Working Paper, April 15, 2002
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