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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

Although North America also has seen increasing CEO turnover, the continent is unique in its high proportion of long-serving CEOs. Among CEOs ending their tenure in one of the four years we studied, 17 percent of North American CEOs had been in office for 15 or more years, in contrast to 6 percent in Europe and 4 percent in Asia/Pacific. This group of long-serving North American CEOs — among them Jack Welch of GE, Chuck Knight of Emerson, Ken Iverson of Nucor, Herb Kelleher of Southwest Airlines, Peter Lewis of Progressive Insurance, Orin Smith of Engelhard, and Hugh McColl of NationsBank — created enormous value for shareholders, and played an essential role in transforming their industries.

Our hypothesis is that the idea of the long-serving CEO is deeply ingrained in the U.S. business culture. In part, this may be the result of an economic environment that has long favored entrepreneurialism; many of America’s largest companies are still led by their founders. Entrepreneurial cultures also adhere to the presumption that individuals can be responsible for the success of large organizations — another factor undergirding the prevalence of long-serving CEOs in the U.S.

Although North America will continue to benefit from successful CEOs of long tenure, we expect that turnover will increase until it is more akin to European rates. Not only will boards terminate CEOs of underperforming companies more quickly, but long-serving CEOs who haven’t created significant value for shareholders lately, however successful they were early in their tenure, will face increasing pressure to retire early.

The big question mark is Japan, which is responsible for the very different pattern we’ve observed in Asia/Pacific: no change in the rate of CEO turnover from 1995 to 2001; the lowest proportions of merger-driven and performance-related departures; the smallest impact of CEO performance upon tenure; the oldest CEOs at ascension; and the least orientation toward shareholder returns. The revival of Nissan under the leadership of Carlos Ghosn — a non-Japanese chief executive — has kindled a debate in that nation about the desirability and feasibility of such aggressive transformations. Only as that debate continues will we know whether Japan will soon adopt elements of the Western management model.

However the Asia/Pacific region grapples with the change, our hypothesis is that CEO turnover will continue to increase globally, sustaining the trend we have seen from 1995 through 2001. There are four reasons:

  • CEO turnover is a means — perhaps the means — to link management to the creation of shareholder value. CEOs who depart for performance-related reasons generate poor returns for shareholders.
  • All CEOs perform better during the first half of their tenure. Since chief executives deliver significantly higher returns for shareholders during the first half of their time in office, we anticipate more pressure from shareholders and boards for more frequent changes.
  • The public is increasingly demanding that CEOs bear responsibility for their company’s problems. The concern in the United States and Europe that CEOs are violating public trust, as symbolized by Enron, is spawning changes in corporate governance that will increase CEO turnover.
  • More experienced CEOs are available to run companies. The combination of shorter tenures and the younger age of CEOs at ascension creates a pool of experienced former CEOs available for boards who want to replace a company leader. Many retired CEOs who are still in their 50s — including those who departed following a merger, those who performed well for shareholders during much of their tenure, and those who were beset by bad luck — remain credible candidates to be CEOs of other public companies. When supply and demand coincide, markets are created.
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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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