With Emerging Economies on the Rise, 2010 CEO Turnover Falls Sharply

In 2010, CEO turnover at the world’s largest 2,500 public companies saw its sharpest year-over-year decline (19%) of the past decade, falling to 11.6%, according to Booz & Company’s 11th annual CEO Succession Study. At the same time, the share of companies headquartered in emerging markets grew to more than one-quarter of the world’s top companies, exerting significant influence on succession rates due to both their governance structures and fast growth rates.

 

Also contributing to chief executive tenure is how closely involved headquarters is in operational decision making; CEOs who are more hands-on tend to exit office quicker, according to a new Booz & Company analysis.

 

The rate of CEOs forced from office fell to 2.2% globally in 2010, declining 36% from 2009 and the lowest rate of chief executive terminations since 2001. Planned departures declined by 1.4 percentage points to 7.7%. Last year, overall succession rates, which also include merger-driven departures, held stable in North America (11.1%) and increased in Japan (18.9%), while falling in Europe (10.2%) and the rest of Asia (also 10.2%).

 

Booz & Company’s report, “CEO Succession 2010: The Four Types of CEOs,” focuses on the role of the CEO and core senior management team, examining how they engage with the businesses they lead and the resulting effect on tenure and turnover.

 

The report finds that Asian economies are becoming the new center of gravity. China, Japan and the rest of Asia comprised the largest “bloc” in the world’s top public companies, with 895 companies, versus North America’s 772 companies and Europe’s 618 companies. For the first time, almost half the top 2,500 are located outside North America and Western Europe, not only in the BRIC countries but in the “next 11” emerging nations. The number of companies from BRIC (Brazil, Russia, India and China) has grown 24% on average annually since 2000, while Chinese

companies alone now account for one in five new companies in the world’s top public companies.

 

China is a major, but not sole, reason for declining CEO exit rates, underscores the report. China’s extremely low turnover rate (5.2%) — less than half the global average – is a major reason for 2010’s turnover decline, and could be attributed to its high degree of government ownership, even in public companies. That said, important factors other than China are keeping a higher proportion of CEOs in office, according to Ken Favaro, Partner at Booz & Company. “Lingering recession aftereffects are encouraging companies to keep current leadership in place, and we’ve also seen improved CEO selection and succession practices. Further, given historically high rates of forced turnover, there are fewer CEOs to replace.”

 

According to the report, CEOs promoted from within the company have historically produced superior returns for their shareholders, and last year the gap widened as insiders generated total shareholder returns on a regionally adjusted basis of 4.6%, compared with 0.1% produced by outsiders. Insiders also left office after an average 7.1 years, versus 4.3 years for outsiders. Among last year’s 291 outgoing CEOs, 81% were insiders when they took the chief position.

 

The report also finds that CEO tenures have shortened over the past 10 years. Overall, CEO tenures were on average 18 months shorter in 2010 (6.6 years) compared to a decade ago (8.1 years). And the length of planned tenures, in which the CEO departs on a date prearranged in agreement with the board, has dropped by 30% over the last 10 years, from 10 to seven years.

 

The study also highlights that boards increasingly separate the roles of chairman and CEO, especially in North America, where only 14% of incoming CEOs were assigned both titles in 2010, versus 52% in 2001. The practice of appointing an outgoing CEO as board chairman to apprentice the incoming CEO is growing in prevalence worldwide and was the case 54% of the time in North America last year and accounted for two-thirds of the succession events in Japan, where it has long been the norm.

 

This year’s report includes an analysis of four corporate management models defined by the way the corporate core — made up of the CEO, the core senior management team and key support services — engages with the rest of the business:

 

Holding company. With a minimal degree of operational management, interacts like a portfolio manager and is interested in results, not how the results are generated.

 

Strategic management company. Offers strategic guidance to its local businesses, but not the supervision of operational decision-making and finds value in linkages and synergies between loosely related business units.

 

Active management company. Shares accountability with the business units for major operational decisions and adds value through close guidance and expertise.

 

Operationally involved company. Sets the strategy for the company as a whole and gets involved in operational decision making for most or all business units.

 

These four corporate management models clearly influence the CEO’s experience in office, according to Booz & Company.

 

The report says that CEOs at operationally involved companies have median tenures of 4.9 years, nearly 25% shorter than highly diversified holding companies (median 6.5 years). Strategic management and active management companies have median tenures of 5.3 and 5.0 years, respectively.

 

Operationally involved CEOs are more likely to depart in the first four years of their stint than holding company CEOs, at a rate of 36% and 17%, respectively.

 

It’s even tougher for operational CEOs who came into their companies as outsiders, with a median tenure of just 3.3 years, compared with 5.0 years for insiders, says the report.

 

Another finding is that most (57%) CEO dismissals at operationally involved companies are a result of disagreements with the board — far more than at any other type of company.

 

Meanwhile, merger and acquisition successions are the most prevalent for active management and operational involvement companies, occurring at 48% and 52% of companies, respectively.

 

”Incoming CEOs need to recognize that there are many factors contributing to the amount of time they’ll have to be successful,” said Gary Neilson, Booz & Company Senior Partner. “Particularly if they come in from the outside or run an operationally involved company, their time horizon to make an impact is much narrower than they might expect. Awareness of their corporate core model can help them lay the groundwork for success early, and perhaps prevent an

unplanned exit.”

 

Additional study findings:

 

The energy sector saw the highest level of overall CEO turnover in 2010 at a rate of 16.3%, well above the global turnover rate. Materials and telecommunications followed at 14.8% and 13.9%, respectively. The lowest succession rates were in the consumer discretionary (7.2%) and consumer staples (7.7%) sectors.

 

Energy companies also claimed the highest forced CEO turnover rate among the sectors studied at 6.2%, a sharp increase over 2009. Healthcare CEOs were also dismissed at a much higher rate than the prior year — from only 0.6% in 2009 to 4.2% last year.

 

Conversely, financial services companies collectively saw among the sharpest decreases in forced departure rates, from 5.2% in 2009 to just 2.1% last year. Dismissals within the industrials sector also declined significantly to a rate of just 0.5%.


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