Who leaves? Why? So what?
A September 2016 “Research Spotlight” by David F. Larcker and Brian Tayan from Stanford Graduate School of Business provides a summary of the academic literature on the relation between CEO performance and turnover.
Key findings of the publication with the title “CEO Turnover” are:
- The relation between performance and forced termination is difficult to measure. It is not always clear whether a CEO resigned or was terminated.
- In general, research suggests that companies are likely to terminate an underperforming CEO.
Larcker and Tayan base these results on the following research publications:
Sample: ~10 studies, 1980s and 1990s
Conclusion: CEOs are not likely to be terminated for poor performance.
Huson, Parrino, and Starks (2001)
Sample: 1,802 CEOs, 1971-1994
Conclusion: CEOs are not likely to be terminated for poor performance.
Jenter and Lewellen (2014)
Sample: 5,356 CEOs, 1993-2011
Conclusion: CEOs are likely to be terminated for poor performance.
Fee, Hadlock, Huang, and Pierce (2015)
Sample: 6,787 turnover events, 1991-2007
Conclusion: CEOs are likely to be terminated for poor performance.
Jenter and Kanaan (2015)
Sample: 3,365 turnover events, 1993-2009
Conclusion: Boards consider industry performance in evaluating CEOs.
Sample: 2,231 companies, 1997-2006
Conclusion: Boards with viable alternatives provide stricter oversight of CEO performance.
Huson, Malatesta, and Parrino (2004)
Sample: 1,344 succession events, 1971-1994
Conclusion: Outside directors and institutional shareholders provide stricter oversight of CEO performance.
Guo and Masulis (2015)
Sample: 1,231 companies, 1996-2009
Conclusion: Independent directors provide stricter oversight of CEO performance.
Fich and Shivdasani (2006)
Sample: 508 companies, 1989-1995
Conclusion: Busy directors provide worse oversight of CEO performance.
Ellis, Guo, and Mobbs (2016)
Sample: S&P 1500 companies, 1997-2010
Conclusion: Directors become better monitors after experiencing a forced CEO termination and provide stricter monitoring.
Brickley, James A., 2003, Empirical research on CEO turnover and firm-performance: A discussion, Journal of Accounting and Economics 36, 227-233.
Ellis, Jesse, Lixiong Guo and Shawn Mobbs, 2016, Do directors learn from forced CEO turnover experience?, Social Science Research Network.
Fee, C. Edward, Charles J. Hadlock, Jing Huang and Joshua R. Pierce, 2015, Robust models of CEO turnover: New evidence on relative performance evaluation, Social Science Research Network.
Fich, Eliezer M. and Anil Shivdasani, 2006, Are busy boards effective monitors?, Journal of Finance 61, 689-724.
Guo, Lixiong and Ronald W. Masulis, 2015, Board structure and monitoring: New evidence from CEO turnovers, Review of Financial Studies 28, 2770-2811.
Huson, Mark R., Robert Parrino and Laura T. Starks, 2001, Internal monitoring mechanisms and CEO turnover: A long-term perspective, Journal of Finance 56, 2265-2297.
Huson, Mark R., Paul H. Malatesta and Robert Parrino, 2004, Managerial succession and firm performance, Journal of Financial Economics 74, 237-275.
Jenter, Dirk and Katharina Lewellen, 2014, Performance-induced CEO turnover, Social Science Research Network.
Jenter, Dirk and Fadi Kanaan, 2015, CEO turnover and relative performance evaluation, Journal of Finance 70, 2155–2184.
Mobbs, Shawn, 2013, CEOs under fire: The effects of competition from inside directors on forced CEO turnover and CEO compensation, Journal of Financial and Quantitative Analysis 48, 669-698.
Significant decline in the number of internally promoted CEOs
February 2018 — Each year, executive search and leadership consulting firm Spencer Stuart tracks CEO transitions among S&P 500 companies. These transitions can be part of a planned succession or can arise unexpectedly, the result of company performance or personal issues. In addition to cataloging the reasons for CEO departures, based on company reporting, Spencer Stuart also examines information about the successors, including whether or not they are internal candidates and whether they have been appointed chairman of the board in addition to CEO.
Spencer Stuart’s 2017 analysis revealed a small uptick in the number of CEO transitions among S&P 500 companies. In addition, Spencer Stuart saw a significant decline in the number of internally promoted CEOs.
CEO exits from underperforming companies rise to a level unseen in 15 years
July 11, 2017 — In 2016, the CEOs of poorly performing companies were 40 percent more likely to be replaced than in 2015, and 60 percent more likely to be replaced than the CEOs of better-performing companies, reports The Conference Board, a business-supported research group.
The report, CEO Succession Practices: 2017 Edition, annually documents and analyzes chief executive officer succession events of S&P 500 companies. In 2016, there were 63 CEO successions among S&P 500 companies.
In 2016, The Conference Board found poorly performing companies – those with an industry-adjusted two-year total shareholder return (TSR) in the bottom quartile of the S&P 500 sample – had a record-high CEO succession rate of 17.1 percent, up sharply from 12.2 percent in 2015. This is the highest rate of turnover seen for this group of companies since 2002 and higher than the 2001-2016 average of 13.9 percent.
“A major driver of this surge in 2016 is the exceptional number of CEO dismissals in the wholesale and retail trade sector. The sector has been battered by a stronger dollar, weakness in emerging markets, and relentless pressure from online one-stop-shop competitors such as Amazon. These factors contributed to widely reported store closures and job losses in recent years,” said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and a co-author of the report with Jason D. Schloetzer, Professor at Georgetown University’s McDonough School of Business. “In this business sector, CEO dismissals were 50 percent of the total succession tally for 2016, compared to 14.3 percent in the prior year.” Oil and gas extraction companies also experienced a spike in dismissals, with 75 percent of CEO succession cases in 2016 classified by The Conference Board as disciplinary, compared to 25 percent in the prior year.
Another notable finding from the report is that companies continue to increase transparency around CEO succession planning. Today’s boards are more inclined to provide earlier notice of the CEO succession event, describe the role performed by the board of directors in the CEO succession process, and shed light on the reasons for the transition. In 2016 and compared to the year before, boards were 30 percent less likely to announce that the CEO succession was effective immediately. “Boards continue to enhance transparency around CEO succession events, issuing disclosures that provide shareholders with more advance notice about a pending succession, and offer greater details regarding the reasons underlying the need for a CEO change.”
Other key findings from the report:
- The stability seen in the succession rate of better-performing companies may indicate that increased scrutiny over executive pay and performance has started to produce results. The succession rate of better-performing companies has shown minimal year-on-year fluctuation, especially in recent years and when compared with the succession rate of worse performers. In the last three years, in particular, the succession rate of CEOs of better-performing companies varied from 9.2 percent to 10.6 percent—for an average of 9.6 percent for the entire 15-year period covered by the study. In comparison, in the last three years, the CEO succession rate of poorly performing companies ranged from 11.3 percent to 17.1 percent. Even in years of higher CEO turnover, such as 2016, the succession rate found among better-performing companies was only 15 percent higher than the prior year, while the succession rate of poorly performing companies jumped by 40 percent. This finding may reflect the pressure that new regulations and shareholders are putting on listed companies to introduce more rigorous metrics of long-term financial performance and ensure the alignment of CEO compensation with such measurable results. In today’s governance and investment climate, CEOs who achieve better performance benefit from even greater job stability while underperforming CEOs are even more exposed to public scrutiny. Such scrutiny may ultimately limit the board’s discretion to keep the underperformer.
- High rates of CEO turnover are also seen among consumer products companies, another signal that the sector is bracing for new strategic and market changes. Analysts contend that the consumer products industry is among the most vulnerable to today’s changes and disruptions. Multiple factors are driving the transformation of the business sector, including: shifts in consumer spending patterns, the advent of the “Internet of Things,” a changing mindset across market segments (with older age groups joining the ranks of digital users and younger generations embracing a new breed of sustainable products), as well as a shift in the global marketplace due to the expanding middle class in the Asia-Pacific region. That these changes require fresh leadership and a renewed strategic vision is confirmed by data on CEO turnover, which, at 20 percent (up from 10.2 percent in the prior year), was by far the highest of all industries in 2016 and among the highest ever recorded by The Conference Board for a single peer group of companies. In contrast, companies in the manufacturing and services industries reported the lowest overall succession rate by industry, or less than 8.0 percent for each sector.
- Much-talked about, gender diversity continues to be elusive at the helm of the largest US public companies, as only six of the 63 CEO positions that became available in the S&P 500 in 2016 were filled by a woman. In 2016, only 9.5 percent of the total number of CEO turnovers recorded by The Conference Board among companies in the index resulted in the appointment of a female candidate. The newly named CEOs include Adena Friedman of NASDAQ, Shira Goodman of Staples, and Michele Buck of The Hershey Company. However discouraging it sounds, this finding is far from the worst in recent years if one considers, for example, that only one woman was named CEO of a S&P 500 company in 2015—the lowest share reported by The Conference Board since 2010. The highest percentage of incoming women CEOs is 18.2 during 2011, when 10 of the 55 cases of CEO succession resulted in a woman as the new chief executive. Overall, female representation in S&P 500 top leadership has grown significantly since 2001, when there were only six women CEOs. That number rose to its highest levels in 2013 and 2014, when it hit 24 in both years. The highest impact of female CEO departure was seen in 2010, when four of the then 12 women CEOs in the S&P 500 (or 33.3 percent) left their position; in the same year, as in 2015, only one of them was replaced with another woman. In 2011, however, the number of incoming women CEOs (10) far exceeded the number of female departures (four), therefore reversing the decline in the total number of S&P 500 women CEOs registered in 2010. In the last two years, the highest percentage of female appointments (10 percent) was seen in the finance and insurance industries, while consumer product companies have the highest number (six) of women CEOs.
- After years of sharp rise, the succession rate of older CEOs has started to normalize at levels seen before the financial crisis, confirming the completion of a generational shift in business leadership. Following the 2008 financial crisis, The Conference Board study reported an acceleration of the rate of succession of CEOs aged 64 years or older: in the 2009–2014 period, their average turnover rate was 25.5 percent, compared to the 8.1 percent seen for younger CEOs. In the last couple of years, however, this phenomenon came to a halt: older CEOs departed in 2015 and 2016 at a rate of 15.1 percent and 16.1 percent, respectively, which is much more aligned with the historical succession rate that The Conference Board reported for their age group in the 2001–2008 period. Overall, this finding suggests that a generational shift in executive leadership might have run its course amid an improvement in firm performance and general economic context. Today, among S&P 500 companies, only 11 CEOs (or fewer than 3 percent of the total) are aged 72 or older: They include Warren Buffett (86 years old) of Berkshire Hathaway, Fred Smith (72) of FedEx, Stefano Pessina (76) of Walgreens Boots Alliance, and Ralph Lauren (77) of the eponymous apparel company; in all cases but one—Seifi Ghasemi (72) of Air Products & Chemicals, named CEO in 2014—these individuals have led their companies for many years or even decades. New incoming CEOs are, on average, in their early- to mid-fifties, while the appointment to the top job of executives aged 60 or older is quite uncommon.
- Departing CEO tenure in 2016 was nine years, but five percent of S&P 500 companies are led by CEOs with tenures of 20 years or longer. In 2009, at the peak of the financial crisis, the average CEO of an S&P 500 company held the position for 7.2 years, the shortest average tenure registered by The Conference Board and down from the 11.3 years found in 2002. However, departing CEO tenure in these large companies started to rebound soon after, rising to 8.4 years in 2011, 9.7 in 2013, 9.9 in 2014, and 10.8 in 2015. (In 2015, the number was partly skewed by Rupert Murdoch of media empire 21stCentury Fox, who left his post after a 36-year tenure). In 2016, departing CEO tenure was nine years, close to the 8.9-year average reported by The Conference Board since 2001. Several factors, including stricter board oversight practices introduced after the Enron scandal and the public scrutiny over pay for performance, may help explain the decline in CEO tenure observed in the 2003–2010 period. The slight reversal of the trend that started in 2011 is likely due to improved economic conditions as well as the natural deceleration of the generational change that a decade of shorter tenure data had been signaling. The longest-tenured CEOs currently serving at S&P 500 companies include Leslie H. Wexner of fashion retailer L Brands Inc. (who has been on the job for 54 years), Warren Buffett of Berkshire Hathaway (47 years), and Alan Miller of hospital management company Universal Health Services (39 years). With a 21-year tenure, Jeff Bezos of Amazon.com also made the list of longest-serving CEOs.
- One out of 10 CEO successions in 2016 were navigated by an interim CEO, a role once used only in situations of emergencies and unplanned transitions. Gradual transitions have become more common and so has the option for the appointment of interim CEOs. In each of the last two years, approximately 10 percent of CEO succession events involved an interim appointment. This has happened, for example, at the media company Viacom, the office supplier Staples, and the discount travel Priceline Group. In these and other cases, the length of service for interim CEOs ranged from one month to nearly two years, with two boards (Viacom and Staples) ultimately offering the permanent position to the executive serving in the interim (Bob Bakish and Shira Goodman, respectively). Previously used in situations of emergency, the practice no longer necessarily reveals shortcomings in the planning process or the need to indefinitely prolong the search for a successor. Instead, it can be implemented for a variety of reasons: to audition the person who is already expected to become permanent CEO; for the interim to groom the eventual candidate to the position; or to serve as “seat warmer” and better manage the public relations aspects of a lengthier leadership transition.
- The immediate appointment of the incoming CEO as board chairman has become a rare exception, as proxy advisors and the investment community increasingly demand independent board leadership. Only 6.4 percent of the successions in 2016 involved the immediate joint appointment of the new CEO as board chairman—the lowest level ever reported by The Conference Board. This finding should be reviewed in conjunction with data on board practices evidencing the growing propensity of US companies, including the larger ones, to either strengthen the independence of the board of directors and ensure a separate and impartial leadership of the oversight body or use the succession as a way for the incoming CEO to earn the additional title of board chairman. In 2016, nine of 10 companies that underwent a CEO succession either already had a board chairman or appointed an outsider to the role who met securities exchange independence standards.
Source: CEO Succession Practices: 2017 Edition / The Conference Board
Significant uptick in CEOs forced out of office for ethical lapses
May 15, 2017 — The share of CEOs forced out of office for ethical lapses has been on the rise, according to the 2016 CEO Success study by Strategy&, PwC’s strategy consulting business. The study, which analyzed CEO successions at the world’s largest 2,500 public companies over the past 10 years, reports that forced turnovers due to ethical lapses rose from 3.9 percent of all successions in 2007–11 to 5.3 percent in 2012–16 — a 36 percent increase, due in large part to increased public scrutiny and accountability of executives.
The increase was more dramatic at companies in the U.S. and Canada. Forced turnovers for ethical lapses at these companies increased from 1.6 percent of all successions in 2007–11 to 3.3 percent in 2012–16 — a 102 percent increase. In Western Europe, the share of CEOs forced out for ethical lapses increased to 5.9 percent from 4.2 percent, and in the BRIC countries, to 8.8 percent from 3.6 percent.
“Our data cannot show — and perhaps no data could — whether there’s more wrongdoing at large corporations today than in the past. However, we doubt that’s the case, based on our own experience working with hundreds of companies over many years,” says Per-Ola Karlsson, partner and leader of Strategy&’s organization and leadership practice for PwC Middle East. “Over the last 15 years, five trends have resulted in boards of directors, investors, governments, customers, and the media holding CEOs to a far higher level of accountability for ethical lapses than in the past.”
The five trends shaping CEO accountability
- Public opinion: Since the financial crisis of 2007–08 and the Great Recession that it ignited, confidence and trust in large corporations and CEOs has been declining; the public has become more suspicious, more critical, and less forgiving of corporate misbehavior.
- Governance and regulation: The rise of public criticism of executives and corporations has translated directly into regulatory and legislative action, and companies in the U.S. and many other countries have moved to a zero-tolerance approach toward bad behavior in the C-suite.
- Business operating environment: Companies increasingly are (1) pursuing growth in emerging markets where ethical risks, such as the possibility of bribery and corruption, are heightened, and (2) relying on extended global supply chains that increase counterparty risks.
- Digital communications: The use of email, text messaging, and social media has created new risks for ethical lapses. A company’s digital communications can provide irrefutable evidence of misconduct, and their existence increases the likelihood that a CEO will be held accountable.
- The 24/7 news cycle: Unlike in the mid- to late 20th century, when most executives and companies could maintain a low public profile, today the lightning-fast flow of Web-based financial news and data ensures that negative information travels quickly and widely.
Despite the global increase in forced turnovers for ethical lapses, companies in the U.S. and Canada have the lowest incidence of such dismissals — 3.3 percent in 2012–16 compared to 5.9 percent in Western Europe and 8.8 percent in the BRIC countries. More stringent governance regulation is one likely reason. Both the legislative requirements for codes of conduct and anti-bribery statutes have been tightened significantly in the United States.
Bigger company, bigger target
The study also found that at the largest companies (those in the top quartile by market capitalization) in the U.S. and Canada and Western Europe, the overall share of CEOs forced out of office was significantly greater than the share forced out in the other market-cap quartiles.
“The fact that forced turnovers for ethical lapses were even higher at companies in the top quartile by market capitalization in these regions supports our hypothesis, since the largest companies are the most affected by the five trends and are subject to the greatest scrutiny,” says Kristin Rivera, partner and global forensics clients and markets leader with PwC US.
“The increasing incidence of CEOs being forced out of office for ethical lapses may have a positive effect on public opinion over time by demonstrating that bad behavior is in fact being detected and punished,” says DeAnne Aguirre, global leader of Strategy&’s Katzenbach Center of Innovation for Culture and Leadership, principal with PwC US. “In the meantime, CEOs need to lead by example on a personal and organizational level and strive to build and maintain a true culture of integrity.”
More facts from the 2016 CEO Success study
- CEO turnover: CEO turnover at the world’s largest 2,500 companies decreased from its record high of 16.6 percent in 2015 to 14.9 percent in 2016, due largely to the drop in merger and acquisition activity. CEO turnover was highest in Brazil, Russia, and India, at 17.2 percent, followed by Japan (15.5 percent) and Western Europe (15.3 percent) and China (15.2 percent). CEO turnover fell in every region Strategy& studied except for the U.S. and Canada.
- Women CEOs: There were 12 women globally appointed to the role of CEOs in 2016 — 3.6 percent of the incoming class. This marks a return of the slow trend toward greater diversity that had been in place over the last several years, and a recovery from the previous year’s low point of 2.8 percent. The share of incoming female CEOs was highest in the U.S. and Canada, rebounding to 5.7 percent after falling for the previous three years. Five industries — healthcare, industrials, information technology, consumer staples, and telecom services — did not have a single incoming female CEO in 2016.
CEO turnover increases when companies are targeted by hedge fund activists
October 3, 2016 – A survey released by FTI Consulting, a global business advisory firm, found that hedge fund activists don’t have to win board seats to influence change at the CEO level. According to the report, even at companies where the activists were unsuccessful in gaining board seats CEO turnover increased by 71 percent over the norm.
According to the FTI Consulting report, hedge fund activism had a significant impact on CEO tenure. In the twelve months following an activist approach, the sample where board seats were won saw 34.1 percent of CEOs leave the company. The group with no board seats won saw 28.4 percent of CEOS out within 12 months, still considerably above the all-company average of 16.6 percent. On a two years basis, CEO turnover increased more than the standard one year turnover rate for both groups, showing that the activism can have an impact even if the CEO survives the initial campaign.
French CEOs hold their positions for twice as long as German CEOs
Shareholder activism key driver – as CEOs held accountable for company performance
July 31, 2017 – Research into the average CEO tenure across Europe has revealed that CEOs of French listed companies are likely to stay in their position twice the length of time of CEOs at German listed companies, says executive search firm DHR International.
DHR International’s analysis reveals that the CEO of a CAC 40 company has held their position for an average of just over 8 years, compared to an average tenure of 4 years for a CEO at a DAX 30 company.
UK and Dutch CEOs, despite having a corporate culture more heavily focused on delivering shareholder value stayed in their position for less time than German CEOs, staying respectively an average 5.4 years and 6.6 years in the position.
DHR International explains that German companies will often have more strict succession plans in place, and therefore CEOs will not stay in their role any longer than originally intended.
In comparison boards of UK, Dutch and French companies are more likely to let the CEO remain in position, often longer than initially expected, if the company is still seen as performing relatively well.
CEO tenure has been in decline over the last ten years, as the average tenure for a CEO globally was 8 years in 2006 (Source: PWC, 2006: The era of the inclusive leader).
DHR International explains that company performance as it relates to stakeholders expectations is one of the key drivers behind CEO tenure. So macro events such as the shock decline in corporate performance following the financial crisis or the resistance of an acquisition or a take-over, can play a role in determining the length of tenure.
DHR International explains that how corporates deal for example with Brexit over the next few years may impact the career length of those CEOs across Europe who are judged to have “got it wrong”.
Frank Smeekes, Managing Partner, Europe at DHR International comments: “CEOs are under greater scrutiny and pressure than ever before. Both shareholders and other stakeholders are increasingly engaged but the interests of those stakeholders may be at odds making it difficult for the CEO to keep inside with all constituents.”
“The world of social media also puts the CEO under pressure to respond almost instantly to developing threats putting them at more risk of pre-emptive action.”
“Brexit is just the latest in the wave of challenges, like the election of Trump, which CEOs have to get right even though the environment is not one they control.”
“German companies are known to have structured succession plans, which – for the most part – will be stuck to. For better or worse, boards of German companies are less worried about taking even a successful CEO out of company when their term is up. That policy ensures strategy is regularly tested and reviewed.”
“Shorter tenure at UK listed companies in comparison to French listed companies could be a reflection of how shareholders and boards feel CEOs have coped with recent challenges or will cope with future changes.”
Rise in shareholder activism key driver in shortening of CEO tenure
DHR International explains that demand for improved corporate performance from traditional shareholders and activist shareholders are behind the shortening of CEO tenure in the last ten years.
Frank Smeekes continues: “Shareholders are now more active and vocal if they feel the CEO isn’t leading the company in the right direction. They will push for a change in leadership if necessary.”
“With an increase in Independent Chairmen and non-executive directors the mechanisms are now in place to take action if the board doesn’t believe the CEO is acting in the best interests of the company.”
“Shareholders will often push for short term growth and expect the CEO to turn a company’s performance around very quickly – however, this can put the CEO under pressure particularly if they are also attempting to implement longer term changes.”
“With the high pay packets of CEOs under the spotlight – it’s unsurprising that shareholders and the wider public are looking for evidence that CEOs are achieving results right from the start of their tenure.”
CEO turnover in 2016
DHR International adds that there was a high turnover of CEOs at German and British companies in 2016. 11 percent of CEOs at FTSE 100 companies left their position in the last year, and 20 percent of CEOs at DAX 30 companies.
Frank Smeekes continues: “Companies are now also looking to bring new experience onto their boards more regularly to help drive innovation.”
“With new threats to businesses as well as an increasing number of disrupters moving into sectors such as financial services, boards have had to adapt in order to retain and grow their place in the market.”
“Tighter corporate governance standards have also discouraged CEOs from staying in place too long.”
“It’s vital that boards place a high importance on succession planning, in order to manage turnover and encourage future growth.”
The research also revealed that French CEOs tended to be older than their Dutch, German and British counterparts – 57.8 was the average age of current CEOs of CAC 40 companies. Whereas British CEOs were on average the youngest at 54.5.