Boards Failing to Penalise Poor Performance

Arun Sarin's exit from Vodafone has caused a flurry of retrospectives, many looking back in wonder at his near-dismissal just two years ago.

It all turned out for the best, but if Sarin had been booted out for underperformance he would've been an exception, according to the latest research from Booz & Company.

Its study of 2,500 companies over 10 years finds little correlation between a CEO's job security and the company's performance.

While European CEO churn is 'significantly higher' at 17.6 per cent than that of North America (15.2 per cent), the average rate for CEO dismissal for poor performance was only 2.1 per cent over a decade.

Bosses at underperforming businesses faced only a 5.7 per cent chance of being fired overall, even if forced dismissals in 2007 were 4.2 per cent -- higher than the 1990s average.

Pressure is clearly increasing on CEOs to deliver -- and quickly. Europe's CEOs average seven years in the role, while in the UK it's just 5.9. The Combined Code on corporate goverance means Europe's bosses are also more likely to be ousted in a boardroom coup: between 1997 and 2007, 37 per cent of all European successions were forced, compared to 27 per cent in North America

Most vulnerable are the bosses in IT, telcos and financial services, making Sarin's smooth departure -- and, to a lesser extent, that of BT's Ben Verwaayen -- something of a rarity.

There are already calls for boards to get tough when it comes to pay and performance. One-quarter of the FTSE 100's companies are underperforming, according to the Telegraph. But will remuneration committees start connecting the dots?

Or is there such a dearth of able business leaders that a poorly-performing CEO is better than none at all?

Other findings:

• CEO turnover is down from 14.3 per cent in 2006 to 13.8 per cent in 2007 -- a result of lower M&A activity, which tends to force departures.
• US CEOs have a longer average tenure than European counterparts -- 8.3 years in 2007 to Europe's 7 years.
• The most secure industries for CEOs are energy (5.8 per cent churn) and industrials (8.8 per cent).
• The rate of planned successions in 2007 was 6.8 per cent.
• In the UK, externally appointed CEOs leaving in 2007 delivered a 'significantly worse' performance than insiders (-11 per cent compared to 2.5 per cent).
• CEOs who are also chairmen are more secure (stand up, Stuart Rose). But only 16.5 per cent of departing European CEOs held both titles in 2007, compared to 75 per cent in North America.