CEOs Face A Revolving Door
CEOs are getting the boot in ever-higher numbers. Data from 2005 shows that more chief executives left office in that year than ever before.
This is part of an ongoing trend that suggests the entrenched CEO-king may be a dying breed.
Impatient investors are thought to be the main cause of the revolution.
As shareholders show a decreasing willingness to tolerate poor results, CEOs who fail to generate positive financial numbers are quickly traded in. According to Booz Allen-Hamilton, the firm that conducted the study, the rate of departure for “underperforming” chief executives is four times higher now than in 1995.
One-third of CEO successions in 2005 were due to either poor performance or a disagreement with the board of directors.
“No longer can a CEO expect to prolong his career by managing the board,” said Alan Gemes, a vice-president at Booz Allen Hamilton.
This intolerant attitude did not always serve investors well, though. The study found that new CEOs hired from within the firm generally did no better initially than their predecessors, although their performance improved with time.
Outside hires produced returns almost four times better than those that came before them, though.
As this information might lead one to expect, CEO poaching has become an increasingly common practice.
But this tactic did not guarantee success, either-Booz Allen Hamilton found that experienced CEOs did no better on average than new and unproven individuals.
15.3 percent of chief executives left office in 2005, representing a 4.1 percent increase from 2004 and a 70 percent rise from 1995.
This was out of a study of the 2,500 largest publicly traded corporations.
It seems that CEOs must do or die. “We believe the current annual rate of CEO turnover is the new normal’,” said Gemes. “Today’s typical CEO knows that he will remain in office only as long as performance for investors is acceptable.”