Researchers at Booz & Co. who studied trends in CEO succession over a 10-year period found a remarkable embrace of internal candidates and a separation of the chairman and CEO roles.
The report, titled “CEO Succession 2000-2009: A Decade of Convergence and Compression,” presents data on CEO succession over the past decade and reveals global trends regarding CEO turnover and the new role of the chief executive. The research, conducted by Ken Favaro, Per-Ola Karlsson and Gary L. Neilson, found that in 2009 worldwide turnover rates remained at the relatively high level of 14.3 percent, a percentage that hasn’t changed much in the past five years. Regional succession rates in 2008 also remained consistent.
“The harmonization of CEO turnover rates suggests that global governance norms are emerging—not by fiat, but through practice—across the world and in every industry.” This convergence is accompanied by specific trends that have redefined the role of the CEO.
In America and Europe, there is an increased tendency to split the CEO and chairman roles, despite no evidence that one method of governance outperforms the other. In Europe, the percentage of incoming CEOs who also hold the chairman role dropped from over 60 percent in 2002 to 7.1 percent in 2009. North American companies showed similar tendencies.
Gary L. Neilson, a senior member with Booz & Company and co-author of the report, believes that, despite no proven performance benefits, this separation of powers is “good for accountability and also for focus.”
Neilson and the team at Booz did find a trend that corresponds directly to improved performance, however; four out of five incoming CEOs in the past decade were appointed from within the company. This is not simply a global coincidence. The trend makes perfect sense, because, as the report says outright: “Insiders perform better.” Insiders are more knowledgeable about the company, its challenges and opportunities. They are familiar with the people surrounding them and may appear more accessible to others. These qualities reflect company performance, and, according to the report, are supported by the numbers: “Of the CEOs leaving office, insiders have produced superior regionally market-adjusted shareholder returns in seven of the last 10 years, averaging 2.5 percent; outsider-generated returns, in comparison, have averaged 1.8 percent.”
Not surprisingly, insiders tend to last longer, too. Over the past decade, insiders held office an average of 7.9 years compared with a tenure of six years for the outsider. In nine of the past ten years, outsiders have been forced out of the CEO role at a rate higher than insiders.
The tendency towards planned succession is a product of rough economic times: “It’s no accident that planned successions have been increasing for the past three years on a global basis,” says the report, “In a time of economic upset and severely clouded visibility, boards have been loath to make sudden moves.”
The convergence of trends like preference for insider succession, a separation of the CEO/Chairman role and average turnover rate is met by what the report aptly calls “compression,” or a smaller window of time to produces results. The global mean tenure of departing CEOs has dropped from 8.1 years to 6.3 years during the past decade, according to the report.
While the report advises a swift implementation of new agendas and a distinguishable set of goals, it downplays the idea of “the first 100 days.” Neilson notes that though this is a “good period to show that action is, in fact, taking place, fundamental change does not happen in 100 days.” It’s important to take a realistic approach to the new position, especially when the transition is still in its seminal stages.
The report offers valuable advice to the incoming CEO in his new complex and increasingly delicate role. The team at Booz & Co. spoke with 14 current CEOs for some inside information about how they run their companies. What emerges from the interviews is valuable advice for any incoming CEO.
Read the full report with the interviews here.