CEO turnover at a record high, outsider executives gaining terrain

25 April 2016 6 min. read
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CEO turnover has reached a record high, according to a new study. Last year 17% of the globe’s largest public companies saw their Chief Executive leave their firm’s ranks, more than in any of the previous 15 years. When it comes to filling in positions, outsiders are gaining terrain, yet, diversity remains an issue, with women taking a mere 3% share of newly appointed CEO roles.

Since 2000, Strategy&, formerly Booz & Company and nowadays the strategy consulting unit of PwC, conducts research into CEO succession. As part of the study, the researchers analysed CEO turnover activity at the 2,500 largest public companies around the world, as well as kept track of key characteristics of individuals such as tenure, chairmanship, nationality, professional experience, gender and prior role/industry.

The data reveals that, for the past 15 years, the rate of change in Chief Executive Officer positions has consistently hovered between 9.8% (2003) to 15.4% (2005). Last year, though, saw a breakthrough in the trend, as CEO turnover reached its highest points since the study’s inception back in 2000. 16.6% of CEOs made way – in 10.9% of these cases success was planned for, while in 3% of the (known) cases CEOs were for one reason or another forced to leave the organisation. CEO turnover on the back of M&A restructuring, which in most cases resembles an inevitable forced departure, had a renewal rate of 2.8%.

In the case new CEOs were appointed in 2015, only 2.8% of those positions was filled in by a female successor, the lowest level since 2011. Just 10 of 359 incoming CEOs in the class of 2015 were women.

The news was even worse in the U.S. and Canada where the share of incoming women CEOs fell for the third year to the lowest in the past twelve years. There was just one woman among the total 87 incoming CEOs in the region (1%), compared to 4% in 2014 and over 7% in 2012. At the same time, however, across the investigated time span the U.S. and Canada still lead the pack, with an average score of 4.0%, higher than the global average of 3.0% and markedly higher than the 0.9% in Japan.

An industry perspective shows that the popularity of female CEOs differs widely across sectors. In the Consumer Goods and Telecom industries the share of women CEOs sits between 4.5% and 4.9%, while in sectors such as Energy, Industrials and Materials the top seat in boardrooms is in about 98% of the cases given to a male CEO. Interestingly, Healthcare, an industry with one of the largest shares of female participation, also finds itself in the lowest ranks.

Outsider vs insider
The Strategy& study further finds that the majority of companies have continued to promote insiders to the CEO position: 77% insiders versus 23% outsiders in 2015. Outsider CEOs have, however, caught up and closed a performance gap that the study previously found between outsider and insider CEOs, which according to the authors, is the result of three main factors.

Firstly, over the past several years more big companies have been deliberately choosing their new CEO from outside of the company. In the latest four-year period (2012–15) boards chose outsiders in 22% of planned turnovers, up from 14% in 2004–2007, which represents a 50% increase in the rate of outsider selection. “An indication that hiring an outsider has become more of an intentional leadership choice than a necessity”, comments Per-Ola Karlsson, a partner at Strategy& in the Middle East.

Secondly, the range of disruptive forces hitting the frontiers of organisations is sparking a growing preference for executives from outside a firm’s own industry. Some of the industries that have been experiencing the most disruption are also the ones that have brought in higher-than-average shares of outsiders over the last several years. This includes telecommunications (38% of incoming CEOs from 2012-2015 were outsiders), utilities (32%), healthcare (29%), and energy (28%).

Karlsson: “While an internal CEO candidate may have an excellent record of achieving the business goals the company has pursued in the past, boards are recognising that this candidate may lack the skills needed to lead the company through the changes necessary to win in the future.” Gary Neilson, a US-based partner at Strategy&, adds: “Outsiders don’t have biases and commitments built up over the years, and can make changes more objectively. They also may be able to look at the organisation from a broader perspective based on an understanding of what the world will require in the future.”

Lastly, Europe’s role in the outsider CEO scene is large, lifting the global average. 38% of new CEOs in Europe came from outside the company, compared to, for instance, just 3% in Japan and 9% in China. Western European companies are also more inclined to hire a foreign CEO – defined as an executive with a different nationality than the organisation’s headquarter location.

Interestingly, female CEOs are relatively speaking more often hired from outside the company than male CEOs are. 32% of all incoming and outgoing female CEOs from 2004-2015 were outsiders compared to just 23% of males CEOs. “That women CEOs are more often hired from the outside may be an indication that companies have not been cultivating enough female senior executives in-house,” comments DeAnne Aguirre, a partner at Strategy&. “One of the reasons why women may be more likely to be outsiders is that their development is not being recognised within their own organisation, and therefore they may be more likely to be attracted away.”

Looking ahead, the authors state that they believe insiders CEOs will continue to remain the preferred succession-planning practice. They conclude: “Whether the new leader comes from inside or outside the organisation, companies that plan for CEO succession more carefully are more likely to be better performing companies in general.”