11/11/08

Sydney, Tuesday, 11 November 2008 – Turnover of ASX 200 CEOs reached 18% in 2007 according to the annual CEO Turnover Study released today by global consulting firm Booz & Company, up from 13.4% the previous year, well above global average CEO turnover of 13.8% and the highest in the study’s eight-year history.

The increase was underpinned by a sharp uplift in regular, or planned, transitions (10.5% in 2007, up from 7.6% the previous year) and in departures following M&A events (5.3%, up from 2.2% the previous year). CEO departures for reasons of performance declined, down from 3.6% of companies in 2006 to 2.2% in 2007.

At 18%, the rate of CEO departures from listed companies in Australia in 2007 was among the highest in the world. CEO transitions were observed at 17.6% of companies in Europe, 15.2% in North America, 10.6% in Japan and 9.1% in other markets.

Australian CEOs also spend less time in the job than their international counterparts. According to the Booz & Company study, Australian corporate chiefs who departed in 2007 had spent an average 5.7 years in the role, close to the long-term average Australian CEO tenure of 5.9 years since 2000. Globally, average CEO tenure was 7.2 years in 2007, down slightly from the long-term average global CEO tenure of 8.0 years since 2000.

While the average tenure of Australian CEOs is relatively short, their performance legacy on departure – as measured by total shareholder returns during their tenure – continues to improve, confirming a trend since 2004. Departing CEOs in 2007 had delivered shareholders an average return of 22%, well up on the eight-year average of 13.5%.

The study also confirms a trend away from external appointments to replace departing CEOs, with 59% of new CEOs coming from within in 2007, the highest proportion since the study began. While ‘insider’ appointments have now outnumbered ‘outsiders’ for the past three years, external hires continue to outperform in the CEO chair, delivering an average 16.6% in shareholder returns since 2000, compared to 11.1% for internal hires.

Booz & Company principal and study author, Vicki Sherwood, said the sharp increase in regular CEO departures in 2007 was consistent with the long-term trend, and suggested CEO transitions were being better planned.

“Australian Boards have embraced the need for structured succession planning and that is coming through in the higher incidence of planned departures, backed up by a continued preference toward appointing their replacements from within,” Ms Sherwood said.

“That CEOs who were external appointments have recorded superior returns does not mean succession planning initiatives have been misguided, rather these initiatives will take time to bear fruit,” she said.

“It remains the case that Australian CEOs have a shorter average window to make their mark compared to CEOs in other markets, but their performance within that window has improved steadily.

“Shorter tenure may be a choice CEOs are making themselves. Our face-to-face discussions with Australian CEOs conducted as part of this study suggest many believe they can put in a strong performance over a short time, and then move on to a bigger role overseas. A CEO in the United States, on the other hand, may have reached the pinnacle of their career path and be inclined to stay longer.

“The rising incidence of planned CEO departures, coupled with their relatively short tenure and improved performance in office generally, points to CEO retention being the next challenge for Boards,” Ms Sherwood said.

The Australian study compares CEO transitions at ASX 200 companies with findings with the firm’s annual Global CEO Turnover Study, examining CEO departures among the world’s largest 2,500 listed companies. CEO departures are classified as being forced (for performance reasons), merger-related or regular transitions, such as retirements or the acceptance of a CEO position elsewhere.

Forty-one departures from the helm of ASX 200 companies were examined in 2007, the most since the study began in 2000. The average number of annual departures since 2000 is 29.

In other study findings:

• Since 2000, the highest average shareholder return (16.4%) has been delivered by CEOs undertaking planned departures, followed by CEOs exiting following an M&A event (16.1%). Not surprisingly, CEOs forced out of office delivered the least to shareholders - 3.9% on average over the period.
• The lower long-term average tenure for departed Australian CEOs of 5.9 years over the past eight years compared to the global average tenure of 8.0 years is partly attributed to the much lower incidence locally of the “Imperial CEO” model (combined Chairman and CEO role) common in North America.
• The proportion of first-time and internally appointed CEOs among all departing CEOs was the highest it has ever been in 2007 – 71% in both cases. The proportion of this ‘inexperienced’ CEO cohort departing has increased steadily since 2003.
• The relative underperformance of insider CEO appointments in Australia compared to outsider appointments stands in contrast to North America, suggesting succession planning processes in Australia are still to mature fully.

Ms Sherwood said that, at only 2.2%, the incidence of forced departures in Australia in 2007 remained low in global terms and in line with the long-term trend in Australia.

“However, this may reflect the sustained strength of Australia’s economy over many years, and if market conditions deteriorate over the short to medium term, we may see the number of forced departures rise,” she said.

About the Australian CEO Turnover Study

For the Australian study Booz & Company identified ASX 200 companies since 1998, a data set spanning 241 companies in 2007. Booz researched if and when a CEO turnover event had taken place for all the ASX 200 companies since 1998.

To identify the companies among the ASX 200 that had experienced a CEO turnover event, annual reports and press searches for each individual company were used. Annual reports provided information on the CEOs for each of the financial years. Press searches were used to complement this data and to confirm the turnover event, and reason for the turnover event. A variety of printed and electronic media sources was used. Additionally Factiva was used to identify announcements of retirements or new appointments of CEOs, Presidents and MDs for the ASX 200 companies in each year since 1998. TSR data was provided by Datastream and included market capitalisation growth, dividends and reinvestment of dividends.

Each company that appeared to have experienced a CEO change in 2007 was then examined to confirm that a change had occurred. Key details of the outgoing executive were collected to identify the underlying reason for the turnover event.

Consistent with the global study, CEO transition events were grouped into three categories: merger-based, in which a CEOs job was eliminated after an M&A transaction; regular transition including planned retirements, acceptance of a position elsewhere, health-related departures or death in office; and performance-related, which included any departure initiated by the Board, attributed by the media to poor financial or managerial performance, or incidents where there was a demonstrable performance shortfall but the departure was described as being for ‘personal reasons’ in press.

About Booz & Company
Booz & Company is a leading global management consulting firm, helping the world’s top businesses, government ministries, and organisations. With more than 3,300 people in 57 offices around the world, Booz brings foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. Booz works closely with clients to create and deliver essential advantage.

For Booz & Company’s management magazine strategy+business visit www.strategy-business.com.