With Emerging Economies on the Rise
With Emerging Economies on the Rise, 10 CEO Turnover Falls Sharply in Europe, Finds Booz & Company Annual Global CEO Succession Study
New Analysis of Corporate Management Models Shows CEOs
More Deeply Involved with Operations See Shorter Tenures
In 10, CEO turnover at the worlds largest 2,500 public companies saw its sharpest year-over-year decline (19%) of the past decade, falling to 11.6%, while CEO turnover levels in Europe fell to a low of (10.1%), falling by 5.1percentage points according to Booz & Companys 11th annual CEO Succession Study. At the same time, the number of companies headquartered in emerging markets grew to more than one-quarter of the worlds top companies exerting significant influence on succession rates due to both their governance structures and fast growth rates.
The analysis also reveals that CEOs who are more involved in day-to-day operations tend to exit office quicker, CEOs whose role is less involved, who focus on monitoring overall business performance and strategy, have substantially longer survival rates in office.
Overall, the rate of CEOs forced from office fell to 2.2% globally in 10, declining 36% from 09 and representing the lowest rate of chief executive terminations since 01. Planned as opposed to forced or merger-driven departures, declined by 1.4percentage points to 7.7%. Last year, overall succession rates outside Europe, which also include merger-driven departures, held stable in North America (11.1%) and increased in Japan (18.9%), while falling in the rest of Asia (also 10.2%). Interestingly, the UK bucked the trend, rising to a high of 14.3%.
Booz & Companys study of worldwide CEO succession patterns examines the degree, nature and geographic distribution of chief executive changes among the worlds 2,500 largest public companies. This years report, CEO Succession 10: 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 will be published in the Summer 11 edition of strategybusiness, Booz & Companys quarterly thought leadership magazine. Among the reports key findings:
Asian economies are becoming the new center of gravity. China, Japan and the rest of Asia comprised the largest bloc in the worlds top public companies, with 895 companies, versus North Americas 772 companies and Europes 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 00, while Chinese companies alone now account for one in five new companies in the worlds top public companies.
China is a major, but not sole, reason for declining CEO exit rates. Chinas extremely low CEO turnover rate (5.2%) less than half the global average is a major reason for 10s 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 Richard Rawlinson, Partner at Booz & Company. Lingering recession after effects are encouraging companies to keep current leadership in place, and weve also seen improved CEO selection and succession practices. Moreover, given historically high rates of forced turnover, and the continuity of business conditions over the past two years there are fewer long-tenured or poorly performing CEOs to replace.
Insider CEOs rule the roost. Companies that promote their CEOs from within have historically enjoyed superior returns for their shareholders, and last year the gap widened as companies with insider CEOs generated total shareholder returns on a regionally adjusted basis of 4.6%, compared with 0.1% in companies lead by outsiders. Insiders also left office after an average 7.1 years, versus 4.3 years for outsiders. Among last years 291 outgoing CEOs, 81% were insiders when they took the chief position.
This years report analyses 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 CEOs experience in office, according to Booz & Company.
Departing CEOs at operationally involved companies have median tenures of 4.9 years, nearly 25% shorter than those from 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.
Its even tougher for operational CEOs who came into their companies as outsiders: they have a median tenure on departure 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 if they come in from the outside or run an operationally involved company, the time they have to make an impact is much shorter than for other CEOs, said Richard Rawlinson, Partner at Booz & Company. Understanding the patterns in each corporate core model can help a new CEO prioritise for early success, and perhaps prevent an unplanned exit.