CEO turnover ramps up amid ethics scrutiny
Increased public scrutiny of corporate behaviour and heightened fee pressures in many industries seem to have given many shareholders itchy trigger-fingers when it comes to offloading their CEOs. CEO turnover increased to almost one in five across the world’s 2500 largest public companies in 2018, with Europe the hardest hit by changes at the top.
The Chief Executive Officer (CEO), is the most senior corporate, executive, or administrative officer in charge of managing an organisation – especially an independent legal entity such as a company or non-profit institution. While the top job is one that the majority of business people aspire to, however, it can also prove to be a poisoned chalice for even the most experienced operators at any company.
Because of the huge level of influence CEOs are said to exert on the culture and performance of a company, the buck ultimately stops with them when results go south. At the same time, in an age of eternal public scrutiny driven by the rise of the internet, scandals can rock a firm in a matter of days, pushing previously secure CEOs from their jobs in a bid to sate critics and avoid reputational damage.
In this increasingly unstable atmosphere, a paper from Strategy& found that CEOs now have a general ‘life expectancy’ of just five years. In the course of less than a decade, the median length of service at the top for the biggest 300 British businesses has shrunk to 4.8 years, down 73% from 2010’s high of 8.3 years.
Now, a new analysis also from Strategy& has shown that this shift has continued to accelerate across the world’s biggest companies. According to data from 2,500 of the planet’s top firms, CEO turnover has now reached its recorded highest level in almost two decades – jumping to 17.5% for 2018. Globally the number of planned turnovers increased from 9.9% in 2017 to 12%, while the number of respondents forced out increased from 2.8% to 3.6%. M&A-related changes remained relatively stable at 2%.
Perhaps the most worrying part of this trend saw researchers find that the number of women elevated to the position of CEO across the companies surveyed has slipped slightly on 2017, falling from 6% to 4.8% this year. The fall represents a knock-back for efforts to address gender inequality in corporate culture, and shows the level of heightened hostility female bosses have to deal with due to more conservative elements of the business community.
Even when women do beat the odds to overcome the glass ceiling in consulting, taking up a leadership position at top consulting firms has often led to controversial exits. 2018 saw Sacha Romanovitch – the first UK female CEO of a major UK professional services firm – was ousted by a Partner coup at Grant Thornton, while Deloitte has also seen heightened criticism for female executives in its US wing. Just months before the ousting of Romanovitch, Cathy Engelbert was blocked from running for a second term as CEO of Deloitte US.
Both CEOs maintained some of the highest favourability among staff in the industry before their departures; however both irked the ranks of their firm's equity holders. Engelbert ultimately took the fall for a poor 2017 at Deloitte, in which the firm was the victim of an embarrassing hacking scandal, along with a number of high-profile auditing blunders. In Romanovitch’s case, meanwhile, the end of her 28-year stay with Grant Thornton comes after overhauling the firm’s partnership structure to make it a John Lewis-style profit-sharing scheme for all staff, prompting some Partners to accuse her of pursuing a “socialist agenda.”
Despite this, perhaps due to the number of female CEOs being drastically lower, the most common reason for sacking CEOs is not due to board level manoeuvring. Instead, when it came to the number of forced changes at CEO level, Strategy&’s research pointed to more and more CEOs losing their position due to ethical lapses.
Heads roll
While the rate of change at the top looks almost certain to top one in five companies per year in the near future, though, shareholders might want to consider the impact ushering out a boss too quickly. While a change can result in a positive impact, or at least reduce the level of damage being done, turnover of a CEO can also have an extremely harmful effect on a company, particularly if there is no planned succession in place.
Strategy& found that the stability long-term CEOs continue to create higher total shareholder returns than short-term CEOs. At the same time, even in the case of a managed change, while succession tends to create a better opportunity for a managed change at the helm, those whom succeed may not be creating as much expected stability for companies as is hoped. The research noted that underperforming heirs tend to be forced out of office quickly.
Western Europe saw some of the highest turnover globally. The number of planned successions was up 1.6%, while the number of forced out almost doubled, from 3% of companies surveyed to 5.8%. The region continues to see strong shifts in compliance-related activity, which has seen some large companies need to make changes at the top as it became clear that business activities were anything but clean, with lapses including increased governance by regulatory and law enforcement authorities, new pressures for accountability about sexual harassment and sexual assault brought about by the rise of the Me Too movement.
Turnover rates in the US and Canada were comparatively stable, at 14.7% in 2018, up 1.5% on the year previous. Planned turnover was relatively stable at 8.3% and 8.1% for 2017 and 2018, respectively. A large proportion of the shift was the effect of forced changes – rising by 0.9% on the year previous.
