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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

The transformation in the CEO’s world has profound consequences for everyone in and around business. CEO-driven changes in management behavior affect the rest of us as employees, customers, and shareholders. In Europe and North America, CEO turnover is the bridge between the behavior of the management team and returns to shareholders.

Our findings suggest several behavioral shifts that can help CEOs to survive — for example, they can focus less on extraordinary gains in shareholder value during their first two years in office and more on organizational and strategic reforms that aim at growth that is both strong and steady. The regional differences, too, will likely have a significant effect. As the world’s largest companies increasingly compete on a global scale, we believe the increasing differences in the behavior of CEOs in the major regions will contribute substantially to which companies win in tomorrow’s marketplaces, and which regions enjoy the most growth.

Although our analysis shows that CEO turnover, surprisingly, declined in 2001 from 2000, we believe the long-term trend toward greater accountability and ever-higher CEO turnover, evident across the years studied, will continue. The business environment has fundamentally changed; the implications of the change are only now becoming visible.

The Facts about CEOs
“The King is dead. Long live the King!” identifies, in the world of royalty at least, what we call a “succession event.” A corporate succession event — the departure of one CEO and the ascension of another — begins and ends a chief executive’s term of office. Typically, the end of one tenure and the beginning of another is a single event, as it was, for example, in the transfer of power from Gerald Levin to Richard Parsons at AOL Time Warner Inc. in 2002. However, on occasion, a CEO departs and is replaced by an interim CEO, who subsequently leaves office when a permanent chief is named. We consider this to be two succession events.

In the largest 2,500 companies in the world, the frequency of CEO succession events increased from 6.0 percent per year in 1995 to 11.2 percent per year in 2000. Despite the drop to 9.2 percent in 2001, the frequency of CEO succession last year was still 53 percent higher than in 1995.

Exhibit 1 shows that the trend in the frequency of CEO succession varies significantly across North America, Europe, and Asia/Pacific. To normalize for the differences in succession rates across the regions, we indexed each region to its rate of succession in 1995. Although Europe and North America show similar patterns, the frequency of succession in Europe increased much more — by 139 percent from 1995 to 2001, compared with only 31 percent in North America. Asia/Pacific is remarkably different: In 2001, the frequency of CEO succession was lower than in 1995.

To understand the drivers of these changes in the rate of CEO succession, we analyzed individual succession events, and assigned each succession to one of three categories:

  • Merger-driven, in which the CEO’s job was eliminated, typically because the chief of the other company in the merger assumed responsibility for the combined enterprise.
  • Performance-related, where the CEO was asked to leave by the board of directors; where there was significant speculation in the business press that performance was the driver of the change; or where the CEO cited job stress as the reason for his or her resignation.
  • Regular transition, in which the CEO retired on a long-planned schedule, took a better position elsewhere, stepped down for serious health reasons, or died in office.

We classified as “regular” any succession that was consistent with a long-planned schedule, or involved the CEO’s acceptance of a better position elsewhere, illness, or death. We classified as “performance-related” any departure that was reportedly initiated by the board, or resulted from poor financial or managerial performance (including scandals), or was attributed to “personal reasons.” To cite one example, when Jeffrey Skilling left the CEO’s office at Enron last year, he cited unspecified personal issues as the reason for his departure; we interpreted his departure as performance-related. Although this approach is necessarily subjective, in the next section, we’ll present evidence that the departures we classified as “performance-related” are in fact correlated with poor financial performance.

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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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