Trading Places: 5 Things to Know About CEO Turnover

10.04.2011

CEO turnover rates among U.S. companies are at their highest peak in six years. According to a recent report by Bloomberg, turnover is at a 13 percent rate after a 15 year low of 10 percent just last year. Besides the well-documented resignation of Apple Chief Executive Steve Jobs, other large companies such as Google, Hewlett-Packard, and PG&E all changed CEOs this year.  The rate of CEO turnover has significant implications as the economy continues its swing between recession and growth. Here are five things you need to know now about CEO turnover.

1)  CEO tenure has decreased sharply.  The average tenure of a recently departed CEO is now less than six years.  Today’s CEO no longer has absolute reign over a company as corporate boards are becoming more powerful and proactive.  CEOs have to produce results more quickly and efficiently and answer to their board, customers and Wall Street.  These high expectations coupled with intense pressure from shareholders have made job security for CEOs anything but a guarantee. This was made quite clear with the ousting of Leo Apotheker from HP after only 11 months. Moreover, boards don’t care just about profits anymore.  Former Time Inc. CEO Jack Griffin was let go after only a year because his leadership style “did not mesh with Time Inc.

2)  High CEO turnover is actually a sign of anticipated growth.  Companies usually stick with their incumbent CEO through times of slow growth and recession, and change leadership as the market rebounds and companies begin to expand again. Revenues of S&P companies are up $2.76 trillion last quarter and many companies, such as Costco Wholesale Corp. and Yum! Brands Inc., are looking for new leadership to guide them towards innovation and increased profits. Rather than focusing on cutting costs and downsizing as a reaction to the recession, companies that believe they can increase market share in these recessionary times are willing to look for new leaders. As companies are willing to seek out new talent to instead of playing it safe, it can be a sign that the market is turning around (at least for their products and services).

3)  Market reaction to a leadership change due to underperformance is generally positive.  After CEO Carol Bartz was let go for failing to turnaround Yahoo, the company’s stock jumped more than five percent. Typically, stocks rally an average of 3.5 percent when an underperforming CEO is forced out.  The market perceives this as a proactive approach taken by the board of directors, resulting in increased investor confidence.  Investors sometimes see the ousting of a CEO as the only option for a company to change and become profitable again. 

4)  The internet and social media has made CEO turnover visible, and at times, messy.   Investors and boards are now sensitive toward not only performance but character issues.  Former HP CEO Mark Hurd attempted to cover up an inappropriate relationship with a consultant but was caught and subsequently relieved of his position; it didn’t take HP long to oust his successor, Leo Apotheker as well, and replace him with Meg Whitman, all in the public domain. Tony Hayward of BP had no choice but to resign following a firestorm of controversy after the Gulf oil spill when his questionable comments went viral.  Today’s CEO works in a highly transparent world where just one mistake can be subject to brutal scrutiny when it appears in our 24/7 news cycle.

5)  Insiders perform better than outsiders.  Over the last decade, four out of every five incoming CEOs were appointed from within the company.  Companies that have strategically planned CEO successions have experienced better results than those that hire outsiders.  Starbucks, for example, experienced a significant rebound following years of stagnant growth (under the leadership of a relative outsider who had been with the company for just two years) when they brought back company veteran Howard Schultz.  Insider CEOs produce higher shareholder returns, have a higher average tenure, and simply perform better overall.  This should come as no surprise since insiders are already knowledgeable about the intricate details of the company and a cultural fit. However, there are always exceptions to every rule.  Sometimes promoting an insider fails and Boards look outside the company for the next CEO.  Case in point:  In 2006, Ford recruited former Boeing executive, Alan Mulally, who subsequently led the company from the brink of bankruptcy and was recently named “CEO of the Year.

With many professionals still struggling in this volatile economy, the high rate of CEO turnover can be a positive sign of things to come.  If companies make smart decisions about who should lead their organization, then the benefits can trickle down with more growth and career opportunities.
 

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