Leadership

Study: Boards Giving CEOs (Slightly) More Job Security

By Jessica Stillman

Updated on: May 29, 2008 / 2:26 PM EDT / MoneyWatch

The Find: An analysis of 2,500 public companies over the last ten years shows that the rate at which CEOs get fired for poor short term financial performance is just 2.1 percent.
The Source: The seventh annual CEO succession report from Booz & Company which will be published in the Summer 2008 issue of strategy+business.

The Takeaway: Booz & Company identified all of the companies among the world's largest 2,500 publicly traded corporations (defined by market capitalization) that changed chief executive in 2007 and analyzed what precipitated the departure at the top. Contrary to popular belief, a few bad quarters won't send the axe whistling down. Gary L. Neilson, Senior Vice President of Booz & Company, punches some holes in a popular rule of thumb:

"The 'two-year rule' â€" the notion that boards dismiss CEOs after two or three disappointing years â€" is a myth. The good news is that boards are providing ample time for CEOs to develop and execute on their strategies."

In fact, CEOs of companies in the bottom ten percent (those whose two-year total shareholder returns had fallen by 25 percent in absolute terms and 45 percent relative to regional industry peers after two years) face only a 5.7 percent chance of losing their job in the next year.

The in-depth study is chock-full of further insights. Among the other findings:

The overall rate of forced CEO departures remains high with nearly one in three executives forced out because of poor performance, an ethical lapse, or disagreements with the board.
The overall turnover rate for European CEOs was significantly higher (17.6 percent) than for their counterparts in North America (15.2 percent), Japan (10.6 percent) and the rest of the world (9.1 percent), but the increase can largely be attributed to a higher rate of planned successions - 8.3 percent, compared with 6.8 percent worldwide.
CEOs in the telecommunications (21.7 percent), information technology (17.4 percent), and financial services sectors are certainly the most at risk for ulcers. Their industries have the highest turnover rates: 21.7 percent, 17.4 percent and 14.4 percent respectively.

For many more insights into CEO succession, check out the full report, and see Peter Galuszka's notes over at The Corner Office.

The Question: Is the short-term financial pressure on CEOs too intense or just about right?