Company boards have become more impatient than ever to replace an under-performing CEO and nearly one in three CEOs resigning from the jobs is forced out.
NEW DELHI: A chief executive officer may be the most envied position in a company, but it is becoming harder to retain the office with the number of heads rolling due to bad performance in a year jumping more than four-fold over the past decade, a new study has said.
The company boards worldwide have become more impatient than ever to replace an under-performing CEO and nearly one in three CEOs resigning from the jobs is forced out, global management consultancy firm Booz Allen Hamilto found in its sixth annual CEO turnover survey.
The survey, published in the latest issue of "strategy+business" magazine, found that less than half of the CEOs who resigned in 2006 left under normal circumstances.
The annual turnover of CEOs, measured in terms of total resignations and new appointments, across the globe increased by 59 per cent between 1995 and 2006. Performance-related turnover, wherein CEOs were fired or pushed out, increased by 318 per cent during the same period, the survey found.
"In 2006, nearly one in three (33 per cent) were forced out of job as compared to 1995 when only one in eight departing CEOs (12.5 per cent) left involuntarily," it said.
Only 46 per cent CEOs left office in 2006 under 'normal' circumstances -- the lowest proportion in the past nine years.
While there have not been any high-profile sacking of a CEO in India in the recent past, there was a huge drama over attempts to remove cardiologist Naresh Trehan from Escorts hospital, where he was the Executive Director.
However, the number of actual resignations dropped last year. The study found 357 CEOs (14.3 per cent) at the 2,500 largest public companies left office in 2006, a 1.2 per cent drop from the previous year.
The trend of CEOs' departures due to merger and acquisitions is also significantly rising, the study found.
The proportion of departing CEOs worldwide who left because of a change in management was 18 per cent in 2005 and 22 per cent in 2006, compared with 11 per cent in 2003.
This is despite the fact CEOs whose companies were being acquired delivered better stock market returns compared to the companies whose CEOs were retiring normally or dismissed.
In 2006, CEOs whose companies were acquired delivered returns to investors that were 8.3 percentage points per year better than a broad stock market average. In comparison, CEOs who retired normally performed 5.3 percentage points better, and those dismissed from office 1.2 percentage points better.
In North America alone, 31 per cent of CEOs who created above-average returns for investors left due to merger-related reasons, the survey found.
Besides, the boardroom infighting is also taking a higher toll on CEOs. The proportion of CEOs leaving due to conflicts within the board increased from just two per cent in 1995 to over 11 per cent in 2005-06.
The survey said boards are today replacing CEOs more frequently over concerns related to poor current performance as well as expectations for a poor future performance, whereas the past dismissals were driven by proven under-performances.
In Europe, the boardroom power struggles drove 22 per cent of CEO departures in 2006.
"Boards are flexing their muscles when dealing with chief executives who lack a path to future growth. This increasing conflict is heightened by activists who demand board seats, launch proxy battles and mobilize shareholders to force changes," Booz Allen's Senior Vice President Steven Wheeler
In North America, several CEOs who created above-average returns for investors were forced out in 2006 because of concerns about their ability to deliver future returns, the study found.
The companies are also grooming in-house candidates for chief executive position rather than hiring 'outsider' CEOs, appointing interim chiefs, and opting for candidates with previous experience running a public company, the report said.
The market for corporate control, including buyouts by private equity firms and hedge funds, rebounded in the last two years, causing record merger-related CEO turnover in North America and particularly in Europe.
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