Risk & Compliance

Splitting Top Jobs Overrated, Says Study

Examination of CEO turnover also finds that ''outsiders'' delivered poorer returns and were more likely to depart involuntarily than chief executiv...
Stephen TaubMay 19, 2004

Companies that split the positions of chairman and chief executive officer perform worse than companies with just one person handling those roles, according to a new study from Booz Allen Hamilton.

That is one finding of the consultancy’s survey of CEO turnover at the world’s 2,500 largest publicly traded corporations. Dividing the two positions has been the norm in Europe for at least a decade, Booz Allen points out. Yet, when the roles are split, returns to investors suffer — they’re 4.7 percent per year lower in Europe and 4.1 percent lower in North America.

The survey found that 9.5 percent of the 2,500 companies changed chief executives in 2003, compared with 10.7 percent in 2002. Forced departures of CEOs also declined last year, to 31 percent from 39 percent, despite the rash of accounting scandals.

It does seem that the worst of the “new millennium corporate crisis” is abating somewhat. To put things in a larger historical context, however, the rate of CEO dismissals increased by 170 percent between 1995 and 2003.

Worldwide, the succession rate was highest in Japan, where 13.8 percent of the largest companies changed their CEO, up 42 percent from the prior year. The rate of succession in Europe remained at 9.7 percent, but for the first time it was higher than in North America, which came in at 9.6 percent.

The study also found that hiring an individual from outside the company makes it likelier that the search exercise will be needed again rather soon.

Globally, 28 percent of the CEOs departing in 2003 were “outsiders” who were hired into the job from another company — the highest proportion in any of the six years that Booz Allen had studied this issue. However, departing outsiders were much more likely to have been forced to resign. In North America, 55 percent of departing outsiders did so involuntarily; in Europe, that figure was 70 percent.

Outsiders also delivered poorer shareholder returns, Booz Allen found. Over the six years of the study, CEOs who had previously led other companies delivered returns for investors that were 3.7 percent lower than the results of first-timers — that is, CEOs who had been promoted from within.

Other findings:

  • The average term for chief executives who left office last year was only 7.6 years, among the lowest since 1995. North American CEOs enjoyed the longest terms, averaging 9.4 years; European tenures were the shortest, at 6.5 years.
  • Surprisingly, no more than 0.3 percent of CEOs in any year of the Booz Allen study have been dismissed due to accounting irregularities or financial missteps.
  • The younger the CEO when hired, the higher the likelihood of being fired. Chief executives forced from office last year averaged 49 years old when they were hired; CEOs who retired voluntarily were 54 when they started.
  • In 2003, the industries that saw the highest rates of CEO turnover were utilities (14.3 percent), energy (11.5 percent), health care (11.3 percent), and materials (10.7 percent).
  • Utilities had the highest rate of forced turnover in 2003 (5.7 percent), followed by telecommunications services (5.2 percent) and information technology (4.9 percent).
  • Financial services was the safest industry for CEOs. From 1995 to 2003 the financial services industry had the least turnover overall (7.7 percent) and the fewest forced departures (1.8 percent). Other industries with relatively low turnover rates during this period were consumer staples (9.7 percent) and health care (10.3 percent).