Fewer CEOs being given the boot, report finds

Photo courtesy of Viewminder on Flickr

Photo courtesy of Viewminder on Flickr

Rob Swystun, Pristine Advisers

CEO dismissals dropped to their lowest mark in a decade last year, according to a report from The Conference Board, Inc.

Less than 16% of CEO turnover in 2014 was the result of top dogs getting the boot by boards of directors, The Conference Board’s CEO Succession Practices: 2015 Edition found. This was down from 23.8% in 2013 and 29.4% in 2012, signaling what the authors call a significant improvement in the US economy. Seeing as how the last few years saw about one in four CEOs get the sack, a lower turnover rate had to be expected eventually, they noted.

The report, which The Conference Board releases annually and which has tracked CEO turnover since 2000, also showed emerging trends like companies continuing to separate the board chair and CEO roles. This, the authors say, is an indication that more companies are embracing true board independence.

Only 8% of CEO successions in 2014 involved immediate joint appointment as board chairman. This was down from 2013’s mark of 9.5% and 18.8% in 2012.

Further to that, a review of the 2014 succession announcements showed that 34.7% of departing CEOs remained as executive or nonexecutive board chairman for a brief transition period — usually until the next shareholder meeting rolled around — which the authors also pointed to as companies seeking to strengthen board independence and assure separate, impartial leadership of the oversight body.

Shifting CEO Oversight

For the first time, the report found, the practice of having the full board evaluate the CEO’s performance lost ground to having just the compensation committee handle the evaluation process.

The researchers attributed this to higher scrutiny of the link between CEO pay and performance and increasing specialization of the compensation committee in defining appropriate performance targets for C-suite executives.

Letting Go

Policies that allow for retaining a departing CEO on the board have continued to wane in popularity as companies embrace the aforementioned board independence. A large majority of companies across a wide swath of industries indicate that they lack a formal policy for keeping departing CEOs on the board. And, in fact, some companies even have policies in place to ensure they do not keep a departing CEO on the board.

Even the Best Making Changes

Over the past few years, the top performers on the S&P 500 have refrained from making switches at the top. This is likely due to them not wanting to shake things up with investors as they continued their recovery from the last big recession.

However, 2014 saw that trend stop. Last year saw a more balanced CEO turnover rate between the top and bottom performers in the index. Companies in the top quartile by stock performance saw a 9.9% succession rate compared to just 6.9% in 2013. The succession rates among top performing companies had been on the decline since 2011.

Changing of the Guard

There appears to be a changing of the generational guard of sorts going on, as CEOs who are at least 64 year of age had a 28.6% succession rate, the highest level among the older CEOs in the past few years and nearly three times the average for the entire S&P 500 for this year. The average succession rate among younger CEOs was only 6% this year. Back in 2001, companies weren’t nearly as eager to get rid of older CEOs, as they had less than half of the probability seen today of getting replaced.

High and Low

The services, wholesale and retail, consumer products, and natural resource extraction industries saw CEO succession rates of greater than 10% in 2014. Researchers say this higher than average succession rate in the retail and consumer products sector is likely due to poor stock performance for companies in this sector. A less than stellar Christmas selling season saw many companies miss their sales expectations for last year.

As for the natural resources extraction industry, they sank in the equity market during the last half of last year because the Organization of the Petroleum Exporting Countries reduced demand forecasts in the United States while maintaining existing production levels.

Companies in the financial and insurance, transportation and communication, and manufacturing industries, on the other hand, had an overall succession rate of less than 10% in 2014, which was either in line with or lower than their 2013 levels.

Tenure Time

The stable economic conditions and improved corporate performance of the last few years have served to halt another trend, that of short tenures for CEOs in the first decade of this century.

At the peak of the last financial crisis in 2009, the average CEO of an S&P company held that position for 7.2 years, which was the shortest average tenure registered by The Conference Board. By comparison, the average tenure in 2002 was 11.3 years. Once the financial crisis was over and things started to mend, CEO tenure quickly reflected this, rising to an average of 8.4 years in 2011, 9.7 years in 2013 and 9.9 in 2014. Last year’s average was the longest since 2002.

The CEO Succession Practices: 2015 Edition was authored by The Conference Board Managing Director Matteo Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board and was supported by a research grant from Heidrick & Struggles.

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