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Financial directions – Failure to appoint home-grown CEOs

Management consultancy Booz Allen Hamilton has surveyed 2,500 of the world’s largest companies and the succession statistics of their CEOs.

The study, CEO Succession 2003, finds that 9.5% of CEOs left their jobs in 2003. This figure has consistently fallen since its peak of 12.9% in 2000.

Overall, performance-related successions – any departure initiated by the board attributed to poor financial or managerial performance – have decreased to just 3% of CEOs from companies surveyed worldwide, from 4.2% in 2002. However, the number of CEOs that have left European companies for performance-related issues has increased slightly.

“CEO accountability has been strong in the US for some time,” said Alan Gemes, a vice president at Booz Allen Hamilton. “There has been more focus on performance and accountability (in Europe). Businesses have moved away from the cozy times.”

European boards have increasingly replaced CEOs for poor performance at a rate that has more than quadrupled since 1995, when only 1% of European companies fired their CEO.

Median shareholder returns among North American and European companies with an internally appointed CEO were 2.7% and 1.6% growth respectively in 2003, compared with external appointments which generated 1.3% and -3.5% growth. These results are similar to other world regions, and consistent over the past six years.

The study says that despite better performance of internally appointed CEOs, there is an “inadequate pool” of potential internal candidates. But Gemes views this as an opportunity for the CFO to take on the vacant position. “The CFO should be the prime candidate for succession to CEO.

A CFO will have a good understanding of the company, and should have a good overview across its businesses and operating units,” said Gemes.

The proportion of CEOs who are appointed externally has grown significantly in European organisations in 2003, from 13% to 44%.

CEOs who left office as planned in 2003 generated average shareholder returns 4.4% ahead of their regional stock markets, and 6.9% higher than counterparts who were forced from office.

The survey also suggests that splitting the roles of chairman and chief executive does not result in higher shareholder returns. Returns were 4.7% lower in Europe and 4.1% lower in the US per year in companies with split roles.

Merger-related successions remained static, but Booz Allen Hamilton expects M&A activity to increase in the near future, which will result in more CEO job losses.

The average tenure for a CEO in a European company is 6.5 years, compared with 9.4 years in North America and 7.5 years in Japan. The average CEO tenure worldwide of 7.6 years is the lowest since 1995.

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