The news this year is that even those chief executives who deliver subpar returns are showing unexpected staying power.
One of today’s most pervasive criticisms of corporate behavior is that boards of directors are driven above all else by the stock market’s demands for short-term gains. As a result, they don’t give chief executive officers enough time to develop and implement long-term strategies that will drive sustained performance. New CEOs, the story goes, have two years to boost earnings per share — three if they’re lucky — before their impatient boards give them the ax.
The problem with this story is that it’s not true. The facts, revealed this year by Booz & Company’s annual study of CEO turnover at the world’s largest companies, suggest the opposite. To be sure, corporate boards have indeed become somewhat more likely to dismiss their chief executives since 2000 than in the previous decade. But there is no evidence that those boards are moving hastily to fire CEOs because of poor short-term results, according to our analysis of 10 years’ worth of data. In fact, we find that even the worst-performing CEOs face a low probability of being forced from office in the short term. Rather, the uptick in dismissals is due largely to an increase in board struggles.
Our current study of CEO turnover includes data for the world’s largest 2,500 public companies for 10 full years — 1995, 1998, and 2000 through 2007. This year’s data shows a continuation of many of the trends that emerged earlier in this decade. For example, the overall rate of CEO turnover — which includes planned successions, dismissals, and merger-related departures — was 13.8 percent in 2007, compared with 14.3 percent the year before. This slight decrease carries on a downward trend in turnover from the high in 2005 of 15.4 percent. Separately, we found that boards continue to dismiss CEOs at a higher rate in the 2000s than in the 1990s: In 2007, the global rate of CEO dismissals due to poor performance or to boardroom disagreements was 4.2 percent. This is well above the rates we observed in the 1990s, but near the average for this decade.
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