The Booz & Company study concludes that the nature of the recession is leading boards of directors of Western companies to stick with the leaders they know. CEO departures fell 0.5 percentage points in North America and 1.9 percentage points in Europe in 2008 over 2007, while globally that figure climbed 0.6 percentage points. Conflict-related departures, where CEOs and boards parted ways over differences in strategic direction, also fell in North America and Europe, by 0.3 and 0.2 percentage points respectively.
"Although boards feel more comfortable keeping their battle-tested captains at the helm, the economic storm is being viewed as a test of leadership. Scrutiny of CEO decisions has increased, and we expect turnover rates to rise again as boards assess their leaders’ performance," said Gary Neilson, Senior Partner at Booz & Company. "Moreover, we’ve seen more former CEOs stepping into the chairman role, which indicates that boards are managing against risks in leader preparedness."
The report, "CEO Succession Survey 2008: Stability in the Storm," will be published in the Summer 2009 issue of strategy+business, Booz & Company’s quarterly thought leadership magazine, on newsstands May 26, 2009. Among the key findings:
- The reasons for CEO departures were remarkably consistent with past years. Of the 361 succession events among the companies studied, 180 were planned (retirement, illness, long-expected changes), 127 were forced (where a board removes a CEO for poor financial performance, ethical lapses or irreconcilable differences) and 54 were prompted by mergers. By comparison, in 2007, 346 CEOs left their companies; 169 departures were planned, 106 were forced, and 71 followed a merger.
- Financial services and energy led all other industries in turnover rate increases. The financial services industry saw 18% of its CEOs losing their jobs, breaking with the patterns of previous years. The rate of forced successions was 8.8%, more than double the historical rate of 3.4%. Forced turnover in the energy sector also hit a record high, with 5.6 % of its companies’ CEOs ousted, versus the typical 2.7%, as enormous commodity price volatility in 2008 ended the comfort of steady high returns for much of the 2000s.
- Meanwhile, industries that are less sensitive to discretionary spending, such as industrials, utilities, healthcare and consumer staples experienced stable leadership, with turnover rates falling below their historic rates.
- The average age of this year’s incoming CEO class is 52.9, nearly two years older than the average 51.0 years of age, which has held steady over the past decade.
- Nearly 20% of the CEOs studied have had held the top position before, almost double the 9.8% average rate for the 11 years Booz & Companied has studied (1995, 1998; 2000-2008). Importantly, 65.6% of new CEOs have run a business, with 18.9% having served as CEOs before, 27.4% serving as business unit leaders, and others who had been regional heads, presidents or chief operating officers. "While a defining experience such as a business transformation campaign, turnaround or major new product introduction can help close the deal for a new CEO being hired, it’s clear that what boards value most is the experience of having run a business," said Per-Ola Karlsson, Partner of Booz & Company.
- In Asia, forced removals nearly doubled from 3.8% to 6.1%; in Japan rates jumped nearly four-fold, from 0.8% to 3.1%.
Additional study findings:
The "insider" advantage. Among new CEOs, "outsiders" – those brought in from outside to lead the company – comprised about 24% of the incoming class, compared to 76% who were "insiders", promoted from within. Further, boards now appear to be "road-testing" potential leaders as chief operating officer or chief financial officer before giving them the wheel; 15% of new insider CEOs were auditioned, meaning they joined the company they now lead within the past three years.
International, but not multicultural. Although 52% of incoming chief executives have previously held an international title, just 13% hail from countries outside the company’s home nation. All but four of the 361 new CEOs are men, despite at least half of developed nations’ workforces being made up of women.
Resurgence of the "apprentice" model. Half the incoming CEOs in planned successions assumed office having been apprentices, as their predecessors ascended to the Chairman role. This trend grew profoundly in North America, where 2008 saw 57% of new CEOs taking office in an apprenticeship situation, 20 percentage points above the region’s historical average. While the apprentice model has always characterized Japanese businesses – with 82% of that country’s outgoing CEOs over the 11 years studied falling into that pattern – it is unusual in North America, which typically sees just 42% of outgoing CEOs having been apprenticed in the same period.
North American CEOs seen safest. CEO tenure in North America is the longest it has been since 2000. Outgoing CEOs in the region enjoyed a median tenure of 7.9 years in 2008, versus 7.2 years in the 11 years Booz & Company has been analyzing data.
Seven actions for the New CEO. The report outlines seven steps that today’s freshman CEO class needs to take to steer a course through the current turbulence and position their companies for longer term success. Among the steps are resetting expectations of how the business will work, affirming or changing the leadership team within 60 days, keeping an ear to the market through customers and suppliers, and engaging the board around its expectations.
Building a Better Leadership Bench
Given the unprecedented conditions in the global economy, the challenge of developing leadership is urgent, particularly for the next generation of CEOs. In that vein, Booz & Company advises top management to take several key approaches to succession planning. First is to take care not to leave succession planning in the human resources department’s hands; leadership development works best when led by a company’s leaders. Boards must be engaged in the process.
Senior management, up to and including the CEO, needs to help conceptualize, craft and deliver leadership programs, tools, experiences and messages. These should be carefully integrated with the business strategy, always grounded in a business case demonstrating the need for enhanced leadership capability, the expected outcomes of leadership development, and the resources and processes needed to deliver superior leadership. Finally, a corporation’s leadership development strategies should address the complexities of managing an increasingly diverse, multigenerational, multicultural workforce characterized by different motivators and expectations.
