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Published: July 15, 2002


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

The second rule for contemporary CEOs: Manage against the major risk factors. Driving growth means identifying and serving customer needs in ways dramatically better than those that preceded. That often requires a company to take sizeable bets. These can be managed — by focusing on the core businesses even as new businesses are being developed, by applying a portfolio approach to strategic investments, and by creating sensing networks that enable the company to rapidly see and adapt to changes in the markets it serves. Such risk management mechanisms are essential; downside performance, our analysis shows, drives turnover more than a lack of upside performance. Remarkably, in Europe and North America, CEOs who ultimately departed for performance-related reasons actually performed better than their peers in the first half of their tenures. It was the significant decline in their performance during the second half that was responsible for their departure. Steady, good performance results in greater CEO longevity than a spurt of excellent performance followed by a decline (see Exhibit 16).

It also appears that steady, good performance is better for shareholders. There is a chicken-and-egg question here — does good performance lead to longevity, or does longevity lead to good performance? — but the general conclusion is inescapable: Longer CEO tenure correlates with greater total shareholder returns (see Exhibit 17).

Longer-tenure CEOs perform better for their shareholders in both halves of their tenure (see Exhibit 18). Dividing returns by tenure highlights a very interesting finding: Both long- and short-tenure CEOs underperform the stock market during the second half of their tenure. Long-tenure CEOs start strong and then fulfill the market’s expectations. Short-lived CEOs end with very poor performance (although the positive mean returns imply that some start very strong).

The third rule for the CEO: Define and achieve your change agenda quickly. The declining tenure for CEOs, especially CEOs with performance-related departures, underscores the need for speed; in 2000 and 2001 the average tenure for CEOs with performance-related departures was only 4.7 years, as clear a sign as any that shareholders expect action quickly. The findings in Exhibit 18 also are consistent with our experience in consulting for major corporations: Most CEOs are much more effective in driving change during the first part of their tenure. Sustaining beneficial change and persistently exceeding the market’s expectations is the hallmark of the most successful CEOs.

Globalization and the CEO
Throughout our analysis, we’ve highlighted significant differences in the pattern of CEO careers in Europe, North America, and the Asia/Pacific region. What are the likely implications of the differences?

Europe is the most aggressive region in replacing CEOs whose companies aren’t performing well; it has the highest proportion of both performance-related and merger-driven turnover, the fastest rate of growth in CEO turnover, and the shortest average CEO tenure. Our hypothesis is that the growing importance of shareholder returns in a global economy, marked by increasing competition for capital, suppliers, customers, and talent, is accelerating the pace of transformation in large European businesses. The insistent process of natural selection in Europe, in which CEOs unsuccessful in delivering superior returns to shareholders are rapidly replaced, should result in an even more capable leadership of major European companies, improving Europe’s competitiveness in the global economy.

Yet, despite the growing importance of a broader set of shareholders, our hypothesis is that all stakeholders will continue to be important in Europe. That balance helps European CEOs to avoid the massive restructurings that have created immediate shareholder value in North America, but have resulted in short CEO tenures because the change wasn’t sustained. The challenge for European CEOs will be to find the balance between shareholders interested in rapid improvement and stakeholders who are more resistant to change. Finding such a balance can result in sustained growth in revenue, income, and shareholder returns, as well as harmonious relationships among the company, its employees, and its community.

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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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