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% 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 study of worldwide CEO succession patterns examines the degree, nature and geographic distribution of chief executive changes among the world’s 2,500 largest public companies. This year’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.
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 in the top 2,500 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. 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,” Ken Favaro, Partner at Booz & Company, said.
“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.”
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.
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.
Long-term trends in governance still hold. 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.
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.
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. Merger and acquisition is the most prevalent reason for successions in active management and operational involvement companies, accounting for 48% and 52% of turnovers in those 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.”
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%.
The Middle East comprised 2.2% of the world’s top public companies, with 54 companies. Of these companies, nine, or 16.7%, experienced CEO turnover in 2010; 3 of which were forced, 6 planned, said Bahjat El-Darwiche, Partner with Booz & Company.