Does CEO churn reveal a short-sighted company?

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By: Wise Marketer Staff |

Posted on June 18, 2002

Chief executive offers (CEOs), and those being groomed for the job, now have such a short tenure that their chance of instituting meaningful organisational changes is greatly reduced. And companies continue to focus on the short-term and may well sacrifice long-term goals for perceived short-term pay-offs, according to research by DBM (formerly Drake Beam Morin).

The study, Turnover at the Top: Research Highlights from a Global Study, analyses data from 481 public and private businesses during the years 2000 and 2001. The participants span 50 industries and 25 countries, although 37% of them are located in the US. Data from the same group of companies going back to 1990 was also studied to provide appropriate comparisons.

Key findings
The trend toward an ever-briefer tenure for any employee is far from new - but the rapidly decreasing length of tenure for CEOs appears to be a worldwide phenomenon. The study notes several key findings:

  • CEO tenure continues to decline. CEOs across the globe can expect only three years' tenure. The survey found that only 28% have been in office for five or more years, compared to 37% in 1998-1999.
  • Departures result less often from mergers and acquisitions. Retirement (28%) and resignations (24%) played as important a role as mergers and acquisitions (25%) in CEO departures. Previously, 48% of CEO departures were due to mergers and acquisitions.
  • Turnover does not occur in equal measures globally. In France, the median tenure is four to five years, whilst it is three years in the US, and only two to three years in Japan and the UK. In Asia and Australia, 16% had their jobs for five or more years, compared to 32% in Europe, and 28% in both North and South America.
  • Companies continue to hire largely from the inside. Organisations continue to appoint CEOs from within their ranks by drawing on high-level executives who have been with the company for years. Of the 86% of organisations that appointed CEOs from the inside, 29% were previously chief operations officers (COOs) and 13% were presidents.
  • A pendulum effect was identified. In the past ten years, the normal ratio of inside appointees to outside appointees has been 5:1. However, from 1998 to 2000, three times as many appointees were outsiders. But the trend reversed in 2001 when the number of outside appointees dropped by 50% from the previous year. Similar patterns were identified throughout the decade.
  • Service sector CEOs stay longer than other industries. In the services industry, 32% were in office for ten or more years, compared to only 11% overall.

The implications
The reason for such a high turnover rate may well be the current economic downturn. In an environment in which shareholder value has become the main benchmark for CEO performance, financial decline may trigger boards to change top leadership more frequently. But it is also possible that, whether times are good or bad, boards of directors have inflated expectations of CEO performance, so few top executives can sustain the pressure of expectations for any great period of time.

DBM says that age could also be a factor in short tenure. Many CEOs are not appointed until they are close to retirement age. This is particularly evident in Japan where individuals have often spent 25 to 35 years working toward becoming CEO. In the United States, 51% of CEOs appointed from within had spent 20 or more years with the company.

The future
"Clearly, if their leaders change every few years, companies will suffer from a lack of long-term, consistent strategic direction. Such changes are costly in terms of employee uncertainty, and the expense incurred, and also the impact on shareholder value," explains Tom Silveri, president of DBM.

Silveri continues, "Boards of Directors must do more than evaluate CEO performance on the short-term stock price. The answer may lie in creating a compensation program geared to the longer-term, as well as emphasizing leadership development - given that 86% of CEOs typically come from inside the company."

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