With the industrialized economies enduring their third straight year of sluggish growth and bear markets, business has seemed more the subject of Greek tragedy than the center of the global economy. Like Oedipus, some chief executives were overcome by hubris, then humbled by scandal; consider Tyco International Ltd. Chairman, CEO, and President L. Dennis Kozlowski — indicted for tax fraud — or Tokyo Electric Power CEO Nobuya Minami, who resigned after a power-plant inspection controversy. Other CEOs, Icarus-like, flew too close to the sun of the public’s attention, only to fall to earth when their ambitions melted — think Jean-Marie Messier of Vivendi or Bertelsmann’s Thomas Middelhoff. Playing the Furies: shareholders, outraged by the perceptions of excess, and demanding change.
Alas, this drama, which is playing out around the world, is not mythological, not episodic, and not going away. According to our annual study of CEO succession at the world’s largest companies, the forced turnover of chief executive officers of major corporations because of deficiencies in their performance reached a new high in 2002, rising a staggering 70 percent over 2001. The phenomenon is increasingly global in scope: In the Asia/Pacific region, where CEOs of major corporations had been relatively protected from market forces, involuntary succession has now reached levels equivalent to those in other regions.
The conclusion is inescapable: Forced CEO succession has become the “new normal.” Boards of directors are now exercising their power on behalf of shareholders with almost unprecedented vigor. Indeed, the increasing pace of performance-related CEO turnover shows that aggressive shareholder capitalism has become the defining characteristic of business in the 21st century, as significant an attribute as managerial capitalism was in the 20th century.
Because regulators and the media currently are fixated on “bad behavior,” boards have concentrated on ensuring the accuracy of financial information and removing poorly performing CEOs. Inevitably, the pendulum of public pressure will swing from correction to perfection, with shareholders’ representatives focusing on how to improve CEO selection and performance. Anticipating this shift, we expanded our survey this year to include demographic and situational variables in an effort to identify correlates of CEO success.
Among the specific conclusions from our second annual study of CEO succession at the world’s 2,500 largest publicly traded companies, we found:
• Involuntary, performance-related turnover reached a record high in 2002 , accounting for 39 percent of all successions, up significantly from 2001, when forced turnover accounted for one-quarter of all events.
• The rest of the world is evolving toward U.S.-style deliver-or-depart leadership. CEO succession events are up 192 percent in Europe and 140 percent in the Asia/Pacific region since 1995, our study’s benchmark year; in North America, where frequent turnover at the top has been the norm, succession events increased 2 percent during the same period. In the Asia/Pacific region, which had been relatively immune to forced succession, involuntary departures accounted for 45 percent of all turnover last year.
• Boards are judging CEO underperformance more strictly. Chief executives who were dismissed in 2002 had generated median shareholder returns 6.2 percentage points lower than those generated by CEOs who retired voluntarily. In 2001, it took an 11.9 point shortfall to prompt a firing; in 2000, fired CEOs underperformed retiring chiefs by 13.5 points.
• Merger-driven transitions declined considerably in 2002 even as forced successions rose , indicating that CEOs face increased pressure to grow their businesses organically. Merger-related successions made up 15 percent of all CEO turnover globally, down from 27 percent the previous year and 29 percent in 2000.
• The only “safe” industry for CEOs is financial services. Telecommunications firms experienced by far the highest rate of forced CEO turnover in 2002. Financial services, industrials, and consumer staples continued to enjoy exceptionally low turnover rates last year.