Corporate governance

CEO turnover rises in 2012

Fifteen percent of CEOs of the world's largest public companies left last year, up from 14.2% in 2011, a change that has generally enhanced shareholder value, according to a co-author of a new study by Booz & Co.

The 2012 turnover is the second-highest in the 13-year history of annual studies by Booz of the 2,500 largest companies by market capitalization, lower only than the 15.4% in 2005.

For the 713 U.S. and eight Canadian companies in the study, the CEO turnover rate was 14.3%, according to data provided separately by Gary L. Neilson, Booz senior partner based in Chicago. Mr. Neilson is co-author of the 28-page “Time for New CEOs: The 2012 Chief Executive Study.”

That figure is up slightly from 2011, when 13.6% of chief executive officers from companies in the U.S. and Canada changed jobs. The highest turnover for U.S. and Canadian companies combined was 16% in 2005. Booz, a global management consulting firm, generally doesn't break out data by country, he said.

Mr. Neilson, in an interview, attributed the high global CEO turnover to two reasons.

“One is you are coming out of the global recession,” he said. “During the recession period … particularly 2010, turnover declined to 11.6%. The reason for that (is) companies are hunkered down and don't make changes. Now they are coming out of that (recession), they are stepping up” CEO changes.

“Secondly, in the context of the last eight years …, there has been this new normal, turnover of around 14% or 15%. Boards are taking on their fiduciary responsibility more seriously,” including doing more planning for succession. Is a higher turnover good for shareholder value? “We think it is,” Mr. Neilson said.

Institutional shareholders have influenced corporate boards to strengthen their succession planning, Mr. Neilson said. “Planned turnover is a sign boards are doing their job. They are not letting things get to the point that they have activist shareholders at their door” to make changes, he said.

As far as their impact on shareholder value, “I think CEOs absolutely make a difference,” Mr. Neilson said.

“They make strategic choices” in steering a company's operations and addressing key issues. “Do we go into this business? Do we not go into this business. … It's how well they do it. Do we have the right capabilities to get it done? Do we have the right people, systems, all these kinds of things? Yes, they make a difference.”

CEOs promoted from within their companies have generated higher shareholder return on average than chief executives hired from outside the company, according to Booz data covering 2000 to 2012.

The median annualized shareholder return of companies with insider CEOs who left in 2012 was 2.2% during their tenure, a performance adjusted relative to the regional stock market index for the CEO's company. For outsider CEOs, the return during their tenure was -0.3%, also relative to the regional index.

Company returns of outgoing insider CEOs was above returns of outsider CEOs for nine of the 13 years.

Overall, the 15% turnover of 2012 “is a healthy level (especially) because of the number of turnover events that are planned,” Mr. Neilson said. Going to more forced turnovers “is not a good thing.”

“A lot of (shareholder) activism has sparked a lot” of this turnover, which is good, Mr. Neilson said. Turnover “is running at a healthy level. But if you have the same level of turnover and a different mix (more forced and less planned succession), it would be a different story.”

Should there be more forced turnover?

“There is a cost to forced turnover” in corporate disruption and moving to a new CEO, Mr. Neilson said. “Businesses lose momentum … As a general sense, I wouldn't push for forced turnover.”

Of the 15% turnover rate in 2012, 10.8 percentage points was planned, the highest level since the start of the Booz studies in 2000. In 2012, 2.8 percentage points was forced turnover and 1.4 percentage points was the results of mergers and acquisitions. The 2012 M&A turnover rate, accounting for 9% of the total turnover rate, was the lowest share ever in the Booz studies.

In 2011, the 14.2% turnover rated consisted of 9.8 percentage points planned and 2.2 points each for forced and M&A changes.

Most new CEOs are insiders, although the trend is declining.

In 2012, 71% of new CEOs were insiders, while 29% came from outside the company. In the 2009 to 2011 period, insiders accounted for 80% of new CEOs.

“More companies may now feel stable enough to take a bit of a risk on an unknown leader,” the study stated.

In 2012, 78% of new CEOs at U.S. and Canadian companies were insiders, while only 56% were insiders at companies in Brazil, Russia and India.

Almost all the new CEOs are men. Only 5%, or 15, were women.