June 22, 2018
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Corporate America’s revolving door

By Jena McGregor, Special to The Washington Post.

If it seems like the revolving door at the top of corporate America is spinning faster these days, it is.

Consulting firm Booz & Co. released its 12th annual study on CEO succession recently, and it shows that 14.2 percent of the world’s 2,500 largest companies replaced their chief executives last year. That number is up from 11.6 percent in 2010, and the increase brings the level of CEO turnover back up to historical averages. It also may say something about how boards of directors are feeling about the economy, says Gary Neilson, a senior partner with Booz.

During a recession, boards focus on “hunkering down and getting through it,” he says. But once the business environment appears a little brighter, they start to think more about making changes.

This year’s study, which looks at average CEO tenure, the performance of insider and outsider CEOs, and how many CEOs also hold the chairman’s title, examined the differences between turnover rates in large vs. small companies for the first time. As one might expect, the study found that the largest 250 companies in the study had a slightly higher level of turnover than the smaller ones. “There’s a lot of public scrutiny for these large companies,” Neilson says.

That’s just one piece of evidence that the pressures on boards by shareholder activists and other investor watchdogs are having an effect. Here’s another: The number of chief executives appointed to combined CEO-chairman roles has dwindled to just 18 percent of new CEOs.

When Booz began the study in 2000, 40 percent of new CEOs were also handed the chairman’s role. “Boards of directors are beginning to flex their muscles,” says Sydney Finkelstein, associate dean at Dartmouth’s Tuck School of Business. Even if studies have shown that separating the CEO and chairman roles makes “very little difference to the bottom line,” Finkelstein says, “it has a lot of symbolic value” in an era that values director independence.

What’s less encouraging is that firms appear to be turning to chief executives from outside their corporations, despite evidence that inside CEOs produce higher shareholder returns. In 2011, the Booz study showed, 22 percent of new CEOs were picked from outside the company’s ranks, up from 14 percent in 2007.

Meanwhile, Booz’s study found that not only do CEOs recruited from within outperform their regional market index by a median 4.4 percent (compared with 0.5 percent for outside CEOs), they were also far less likely to be forced out of their jobs. For outside CEOs between 2009 and 2011, nearly 35 percent of non-mergers-and-acqusitions CEO changes were forced, while for insiders this proportion was just 18.5 percent.

Over the past 12 years, the study reports, insiders have stayed in their jobs two years longer than outsiders, on average, and are nearly six times more likely than outsiders to serve a company for nine or more years. But overall, it appears that Corporate America may have a seven-year itch — Booz’s study found that was the median tenure for all North American chief executives between 2009 and 2011.

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