Australia’s resilience to the global economic downturn proved cold comfort for many local corporate chiefs, with the rate of CEO departures reaching record highs in 2008 according to the latest Booz & Company CEO Succession study, released today.
The annual study - measuring the rates of CEO turnover globally and among the 224 companies comprising the ASX 200 at some stage in 2008 - found 22% of Australian CEOs departed their roles, more than in any other region and the most in the nine-year history of the Booz study.
- Booz & Company CEO Succession Study finds rate of CEO departures up sharply to 22% in 2008, a record high for the study and highest rate globally
- Forced departures 40% of all turnovers - financial services, property trust sectors hit hardest
- Trend to insider succession strengthens - 74% of new CEOs in 2008 hired from within
Sydney, Thursday, November 26 2009 – Australia’s resilience to the global economic downturn proved cold comfort for many local corporate chiefs, with the rate of CEO departures reaching record highs in 2008 according to the latest Booz & Company CEO Succession study, released today.
The annual study - measuring the rates of CEO turnover globally and among the 224 companies comprising the ASX 200 at some stage in 2008 - found 22% of Australian CEOs departed their roles, more than in any other region and the most in the nine-year history of the Booz study.
Of the 50 CEO transition events in Australia during 2008, 40% were performance-related – or forced - also a peak for the study and above the level recorded in 2001 at the height of the dot-com crash. Forty-four percent of departures in 2008 were planned (compared to 12% in 2007) and 16% were merger-related (29% in 2007).
Financial services and listed property trusts bore the brunt of volatile conditions in Australia, accounting for half of all forced departures during 2008, and 34% of all CEO transitions.
Australian findings were in stark contrast to those in North America and Europe, the regions hit first and hardest by the credit crunch. CEO departures in these regions fell by 0.5% and 1.9% respectively. Globally, CEOs in the financial services and energy sectors were in the firing line, with forced departures from these sectors at record highs.
The Booz study confirmed the Australian trend emerging in recent years to appoint new CEOs from within, with insiders accounting for 74% of new appointments in Australia 2008, up from 59% in 2007.
Booz & Company principal, Phil Mottram, said it was in some ways surprising that Australia, which had avoided the worst of the global downturn, recorded a higher rate of CEO succession than regions which were more exposed to the downturn.
“But closer analysis of industry sector findings shows the increase in Australian CEO turnover was driven by the sharp rise in forced departures in financial services and property trusts –both at the pointy end of the credit crunch,” Mr Mottram said.
“Globally, unusually high CEO turnover in financial services, as well as energy, was offset by greater than normal stability in recession-resilient industries such as utilities and consumer staples, so the rate of CEO departures globally was lower than in Australia,” he said.
“It is tempting to conclude this is because Boards globally put a premium on stability at the helm in these industries as the crisis took hold. But it may also be that Australian Boards are less timid, and more willing to change under-performing leaders, even in a turbulent year.
“Further, the appointment of internal replacements for many of the departing CEOs mitigated the risk of turnover at the top.Internal candidates bring a greater understanding of the organisation and when cutting costs is a priority, they can hit the ground running.”
For the first time in the history of the study, departing CEOs who had been internal appointments delivered superior shareholder returns over the course of their tenure than external hires - a 1.7% return versus a 14.9% decline respectively. Between 2000 and 2007, departing “outsider” appointments had delivered a cumulative annual shareholder return of 15.3% compared to 10.3% for their “insider” counterparts.
Higher CEO turnover coincided with a sharp drop in average shareholder returns delivered by all departing CEOs, down to -2.3% from the record high of 22% in 2007. Perhaps surprisingly, shareholder returns of CEOs who exited following a planned departure in 2008 slumped from 26% in 2007 to -11% in 2008.
“A key theme emerging from this year’s study is that structured succession planning appears not only to be the norm now in Australia, but is beginning to bear fruit, as seen by departing insiders delivering greater returns than outsiders for the first time in 2008,” Mr Mottram said.
“This is consistent with other Booz research showing that selecting the right internal candidate for a senior appointment can accelerate the benefits to the enterprise by three to five years.
“A key issue for new CEOs will be surrounding themselves with the right mix of leaders to drive growth as we emerge from the downturn. They will need to strike the balance between maintaining tight controls now and giving their executive team latitude to move quickly to seize new opportunities as soon as they emerge,” he said.
Booz found the average tenure of Australian CEOs forced to depart in 2008 increased from 6.0 years to 6.7 years, supporting the conclusion that local Boards were quick to show even long-serving CEOs the door when they were perceived to have underperformed. By contrast, Boards overseas tended to stick with the CEOs they knew in a period of crisis.
Mr Mottram said that preliminary analysis of CEO turnover data for 2009 indicated there would be fewer CEO transition events this year, suggesting companies had stabilised their course as the worst of the crisis passed.
Among other findings of the global study:
- Average global CEO succession at the world’s top 2500 listed companies of 14.4% was up slightly from 2007 but below the peak rates of 2005. Planned (7.2%) and forced (5.1%) departures were up, while merger-related turnover (2.2%) was down. Turnover was 14.8% in North America, 15.1% in Europe, 16.9% in Japan and 13.2% elsewhere in Asia.
- Globally, rates of forced departures at financial services and energy companies were up 159% and 107% on their historical averages respectively. Corporate leadership in sectors considered a safe haven in recession – utilities, consumer staples and industrials – proved more stable, with lower turnover rates than the historical average.
- Companies in North America are steering away from the combined Chairman/CEO title, with only 18% of incoming CEOs sharing the Chairman title.
- Compared to the historical rate over the last 11 years, incoming CEOs in 2008 were almost twice as likely to have had previous CEO experience, suggesting Boards continued to value experience in difficult times.