CEO management and turnover can be a challenging issue for organisations seeking stable governance. In particular, the role of the CEO in relation to boards and governance is a hot topic according to a new worldwide survey of 2,500 public companies.
The CEO Success study by Strategy& (the consulting arm of PwC), shows that conflicts between boards and CEOs is the reason for 13 per cent of CEO oustings worldwide.
CEO turnover is higher in Australia than most other countries at 21.9 per cent (compared to the average rate of CEO turnover of 20 per cent overall). CEO turnover was lowest in North America (14.7 per cent) and highest in the survey for the mature economies of Australia, Chile and Poland.
In the survey, long-serving CEOs are more likely to transition to the board when they finish their years as CEO. The typical profile of the successor to a long-serving CEO is an executive who came up from inside who has deep knowledge of the company but no prior CEO experience, who does not hold the concurrent position of board chair, who has no COO, and faces high board expectations.
The study sheds light on a number of interesting trends. Data unearthed by the 2019 study of the world’s largest shows:
Thirteen per cent of CEO oustings result from conflicts with the company’s board.
According to the report, 39% of CEO oustings in 2018 were due to ethical lapses, 35% were due to financial performance and 13% were the result of conflicts with the company’s board.
“That breakdown is very different than previous findings,” says the report. At the height of the global financial crisis in 2008, 52% of CEO dismissals were due to financial performance, 35% were due to board conflicts and 10% were due to misconduct.” The growing presence and power of activist investors could be a contributing factor to the higher rate of CEO turnover, the report adds.
“The rise in these kinds of dismissals reflects several societal and governance trends, including more aggressive intervention by regulatory and law enforcement authorities, new pressures for accountability about sexual harassment and sexual assault brought about by the rise of the ‘Me Too’ movement, and the increasing propensity of boards of directors to adopt a zero-tolerance stance toward executive misconduct,” the study states.
Long-serving CEOs are more likely to remain as board chair
After stepping down as CEO – 48 per cent of long-serving CEOs remain as chair (compared to 28 per cent for shorter serving CEOs). When it comes to replacing a long-serving CEO, boards and new CEOs can reduce the risk associated with handing off the baton by asking themselves a number of questions, the report says. “Given the long odds that successors face, how can the board best provide support? Is there a case to be made for boards to be more open to hiring outsiders to replace a legendary CEO, despite a decades-long trend favouring insider candidates?
For board members, oversight of a long-serving CEO can be tricky. It’s difficult to make a change when the CEO has performed well over a long period, and there’s much to be said for continuity and predictability. However virtually everyone grows stale at some point, and can easily become locked into a certain frame of mind, the report says.
Given the rapid pace of change inspired by digital technologies, long-serving CEOs are likely dealing with a context that is significantly different from the one they are accustomed to. In addition, some of the best possible successors within the senior executive ranks may become impatient and leave, or be poached.
Board members should think carefully about the right time to shift from a long-serving CEO. New blood brings energy and perhaps a new perspective on how to drive the business.
But data from the report shows it is much harder for a successor to flourish following a long-serving predecessor. Boards have to take care not to become complacent. Term limits, mandatory retirement ages, or other mechanisms aimed at limiting CEO tenure are not a panacea. Boards have to evaluate whether the person sitting in the company’s top slot is up to the task as conditions change. On replacement, the board needs to make clear that the new CEO has their support. This issue can be particularly dicey when the outgoing CEO is also the board chair: The rest of the board should be wary of the chair continuing to run the company and impeding the successor.
Combining CEO/board chair increases risk of ethical lapses
The study defines CEO dismissals due to ethical lapses as “the removal of the CEO as the result of a scandal or improper conduct by the CEO or other employees; examples include fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions.”
In the 2017 CEO Success Study, among CEOs who were forced out, 24% with joint titles were dismissed for ethical lapses, compared with 17% with CEO title only. Boards should be generally mindful of the merits of separating the roles of chief executive and board chair, the report says. “…many governance experts agree that separate roles are the best practice, and governance standards have moved in that direction in many regions. We do know that combining the roles increases the risk of ethical lapses.” “In our 2017 study, we found that among CEOs who were forced out, 24 per cent of those with joint titles were dismissed for ethical lapses, compared with 17 per cent of those with the CEO title only.”
Outsider CEOs outperform insiders
Boards should consider whether the best candidate to succeed a long-serving CEO may be an outsider rather than an insider. In five of the last six years, when the report series examined the performance of departing CEOs, those who had come in as outsiders outperformed insiders. One hypothesis for this differential is that in the current climate of disruption, technological advances and changing competitive dynamics, the most effective candidates may be those whose backgrounds, perspectives and skill sets are different from those possessed by the in-house candidates.
Rate of incoming women CEOs falls
In 2018, the share of incoming female CEOs was 4.9 per cent. This was slightly lower than 2017′s all-time high of 6 per cent, but it continues an upward trend from the low point of 1 per cent in 2008. Unlike in 2017, when the record high was driven by a 9.1 per cent spike in incoming women CEOs in the US and Canada, the largest share of women CEOs in 2018 resulted from sharp increases in Brazil, Russia, India, China and “other emerging” countries. Among industries, utilities had the largest share of incoming women CEOs (9.5 per cent), followed by communications services (7.5 per cent) and financials (7.4 per cent). The lowest share? No women became CEOs of industrials or information technology companies in 2018.