Worldwide, boards of large corporations are dismissing four times more CEOs today than in 1995, a trend that raises an important question: Are boards undermining the chief executive’s ability to lead for the long term?
If it were the case that boards had become trigger-happy, overreacting to brief fluctuations in financial performance or the demands of hedge funds and other short-term investors, the answer would be yes. Companies would undoubtedly suffer as CEOs, trying to dodge the bullet, focused only on quarterly earnings.
But Booz Allen Hamilton’s decade-long study of CEO turnover at the 2,500 largest companies in the world points to a different answer. Boards aren’t overreacting. They are doing what they should have been doing all along: removing clearly inadequate CEOs who in years past would have been sheltered by faulty corporate governance.
While a handful of CEOs are dismissed for illegal or immoral behavior, the vast majority get the ax for dismal financial results stemming from a significant deterioration in the company’s core business. On average, an ousted CEO’s company achieves only half the profit, cash flow, and market capitalization of a comparable company led by an effective CEO for the same length of time.
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