In 2009, as economies around the globe bounced from rock bottom to incipient recovery, 357 new chief executives were appointed among the world’s top 2,500 public companies. Of these succession events, 102 occurred in North America (29 percent), 97 in Europe (27 percent), 49 in Japan (14 percent), 79 in the rest of Asia (22 percent), 18 in Africa and the Middle East (five percent), and 12 in South America (eight percent) — which basically mirrors the relative numbers of the top 2,500 companies in these regions.
According to Booz & Company’s annual study of CEO succession, now in its tenth year, CEO succession on a global basis remained steady in 2009 at 14.3 percent, a level at which CEO turnover appears to have plateaued over the past five years. (See Exhibit 1) Turnover among European CEOs was higher at 15.3 percent. North American turnover declined from 14.8 percent to 12.4 percent. Japan dipped slightly, from 16.9 percent to 16.4 percent. And the rest of Asia increased significantly, from 13.0 percent to 15.3 percent. As one might expect, the Asian segment is increasingly dominated by companies headquartered in China (including Hong Kong), now nine percent of our global sample.
Planned successions (those in which the CEO retires or chooses to leave) constituted the bulk of turnover events in 2009, particularly in Japan (84 percent) and North America (71 percent). The number of forced turnovers (in which the CEO is typically removed by the board) declined region by region. Merger-related turnover was down on an overall basis, but was higher in Europe and the rest of Asia on a percentage basis. In fact, both forced and merger-related successions were highest in Europe, nowhere more so than in the German-speaking countries where merger-related and forced turnover spiked at three percent and seven percent, respectively.
The real story this year, however, is the clear and unmistakable trends of convergence and compression that emerge from our ten years’ of consecutive data on CEO succession around the world.
Convergence
The harmonisation of CEO turnover rates suggests that global governance norms are emerging — not by fiat but through practice — across the world and in every industry. The percentages of CEOs who are replaced each year in Europe, as well as in the rest of Asia, have reached levels closer to those in North America and Japan.
Similarly, CEO turnover rates have harmonised across industries. The 10-year averages all fall between 12 and 14 percent, with the exception of telecommunications (16.8 percent), which is a special case in several respects.
Trends in CEO succession are also converging around a set of emerging norms for new CEOs: A separate and overseeing chairman: More American and European companies are splitting the CEO and chairman roles. At the outset of the decade, roughly half of the North American and European CEOs entering office were named chairman as well. In Europe, that practice spiked in 2003 at 63 percent, although it should be noted that splitting the two roles has long been the practice in the UK, Germany, and the Nordic countries. In 2009’s incoming class, only 16.5 percent of North American CEOs now hold the Chairman title and only 7.1 percent of European CEOs.
Having split the roles, companies in North America and Europe are increasingly appointing the outgoing CEO to the chairman post, with the incoming chief executive as the chairman’s “apprentice.” That has long been the case in Japan.
A trend toward appointing insiders: Four out of every five times, boards around the world choose insider candidates when selecting a CEO, and that ratio has been broadly consistent for 10 years — with relatively minor regional variations. On average over 10 years, outgoing CEOs in Europe and the rest of Asia were insiders 73 percent and 72 percent of the time, respectively, compared with 80 percent in North America and 96 percent in Japan.
Companies to which insiders are appointed tend to perform better for longer. Insider candidates are naturally more knowledgeable about the company and the challenges and opportunities it confronts. “There are many more advantages, I think, than disadvantages with everyone in the company knowing me and having access,” says Gregory D. Wasson, president and CEO of Walgreens, the leading drugstore chain in the United States. “There’s a trust factor that comes along with that.” Wasson joined Walgreens as a pharmacy intern in 1980.
That said, insiders lack the perspective that outsiders can bring. “Coming in from outside has some benefits,” notes Jan Lång, president and CEO of Ahlstrom, a Finnish manufacturer of high-performance specialty papers and fiber composites. “It is easier to ask the challenging questions and not conform to conventional wisdom.”
As for tenure, our 10-year perspective confirms that insiders tend to last a good two years longer in the CEO suite than outsiders – 7.9 versus six years. Outsiders are also more likely to be forced out of office than insiders; that has been the case in nine of the past 10 years.
Experience and stability in turbulent times: It’s no accident that planned successions have been increasing for the past three years on a global basis. In a time of economic upset and severely clouded visibility, boards have been loath to make sudden moves. But the preference for stability and experience predates the recession. Boards have long sought seasoned CEOs, and, indeed, the percentage of outgoing CEOs with prior CEO experience in a public company has trended upward, more than doubling over the past 10 years, although that trend may have peaked in 2007.
Compression
This trend toward convergence and stability might suggest that the nature of the CEO’s job is getting easier — or at least less pressured. But that is not the case. There is a simultaneous wave of compression reshaping and refocusing the job itself. Today’s CEO has more to prove in less time, and increasingly lacks the additional authority of being chairman of the board.
“It’s not the amount of work, but the sheer intensity of it,” observes BT’s Ian Livingston. “It doesn’t seem to drop.”
– The rise of the CEO-only role. As we’ve observed, CEOs no longer typically hold the chairman title as well. Less than 12 percent of incoming CEOs in 2009 were awarded the chairman title, versus 48 percent as recently as 2002. In effect, the CEO’s job is now concentrated on running the company, while the separate chairman is in charge of running the board.
– The poor performance reality. CEOs forced from office have significantly underperformed those who leave on their own terms. In other words, contrary to the perception one might get from many press accounts, the tolerance for poor performance has decreased, further increasing pressure on the CEO to put an agenda in place and produce results.
– The short time to develop and implement an agenda. CEOs in the 21st century must set a course and demonstrate results more quickly than CEOs of a generation ago. Although tenures of 10 to 15 years were not unusual in the latter half of the 20th century, the global mean tenure of departing CEOs has dropped from 8.1 years to 6.3 years during the past decade. CEOs are leaving office at about the same average age as they have historically, but they were older when they entered office: 53.2 years old in 2009 versus 50.2 in 2000. Interestingly, CEOs in Europe have tended to enter office at a younger age than their global peers, but their tenure is also typically shorter.
Implications of convergence and compression
As corporate governance norms have converged across regions and industries, they have become more rigorous and more codified, as has the demand for greater transparency from both regulators and investors.
One implication for CEOs, and those who might be CEOs in the future, is that the CEO’s role has grown exponentially more complex and intense. Another is that the job is more difficult to sustain. Shorter tenures and the increased incidence of planned succession mean that new CEOs will typically have fewer years to drive their agenda.
A third implication is that the increasing tendency to split the job of the CEO and the chairman means that each will be held more accountable than in the past. For CEOs, now more transparently responsible for the company’s success, the pressure for performance is increasing, and the time for producing results has shortened. For the chairman, more transparently responsible for board governance, there is more of an imperative — though less time — to prepare for succession; the stakes for finding the right CEO successor are higher.
The evolving role of the CEO
Every CEO takes the helm at a particular moment in time, and the job is defined accordingly. Today, external forces and internal company dynamics are coalescing in unique and powerful ways across regions and industries. These forces are increasing the challenges facing new CEOs, including the greater pressure to perform and the compressed time frame in which to operate. But they also offer new CEOs a distinct opportunity to make a difference, by creating more clarity and greater transparency about what companies — and CEOs — are here to do.
Based on our observations from the data and our own work with senior management teams across a variety of sectors, we’ve identified four game-changing practices that can substantially contribute to success for new CEOs:
1. Do only what only a CEO can do:With so many tasks vying for attention, the CEO must focus on shaping the company’s definition of success, breaking the frame (for example, by changing some fundamental aspect of the company’s business model), resetting expectations, and integrating the company parts with the whole.
2. Engage with the board as a strategic partner: Boards today need to own strategic decisions jointly with the CEO; they no longer simply anoint them at an annual off-site. The CEO must keep the board engaged in the same way that business units are expected to engage the CEO.
3. Find the right pace of change: Moving too quickly can be as problematic as moving too slowly. Setting the right pace requires resisting arbitrary pressure to chalk up fast wins, while moving rapidly enough on the company’s critical priorities to keep it moving forward.
4. Get the culture working with you: The informal, emotional elements of the organisation are as important as the formal, rational elements. A CEO must understand how these operate and use the organisation’s hidden strengths to move the company forward.
Ultimately it is the CEO’s job to marshal people’s energy and capabilities in pursuit of a shared strategic purpose.
Along the way, the new CEO may be the one to finally bridge the gap between the center and the individual businesses, to reshape the culture around new performance gains and strategic imperatives, and — even more important — to make a fundamental difference in the lives of thousands of people.
“In my experience, people really want to make their mark,” notes Severin Schwan, CEO of Swiss healthcare company Roche Group. “If you ask people what drives them, it is not the money or the career opportunity, although that’s part of it. It is that they really can make a difference.”
Telecommunications: The exception to the industry rule
Not only is telecommunications an outlier in terms of its 10-year turnover rate (16.9 percent versus an industry average of 13.6 percent), but its share of forced turnover (54 percent) is the highest by far of the 10 industries assessed. Indeed, telecommunications is the only industry in which the incidence of forced succession is greater than that of planned succession.
Likewise, telecommunications has not subscribed to the insider CEO norm; these companies have picked insiders only 53 percent of the time, versus an industry average (excluding telecom) of 81 percent.
Finally, telecommunications stands out for the compressed tenure of its CEOs over the last 10 years (5.2 years compared with a 7.5-year global average across all industries). Disruptive industry trends likely account for much of this disparity, but clearly there is also room for improvement in the leadership development programs among telecommunications services providers.