President Harry S. Truman’s famed “The Buck Stops Here” sign has a double meaning for CEOs of the largest public companies: 1) At today’s executive-compensation levels, a lot of actual greenbacks are landing in the C-Suite, and 2) when things go wrong, CEOs are often sent packing — fast.
During the recession, the pace of CEO churn slowed — likely for the same reason the divorce rate dipped — since shareholders and spouses alike tend to favor stability in tough times. But in both cases, new research suggests, an improving economy is making couples and corporations rethink their relationships.
Last year, 14.2% of CEOs at the world’s 2,500 largest public companies were replaced, compared with only 11.6% in recession-plagued 2010, according to Booz & Co.’s 12th annual CEO succession study. The new numbers match the study’s pre-recession averages.
But Booz’s most compelling findings were these:
The Largest Companies Have the Highest CEO Turnover Rate
From 2001 to 2011, the 250 global companies with the highest market cap had CEO turnover rates that were nearly 2 percentage points higher than the companies ranked 251-2,500.
CEOs Who Were Promoted Through the Ranks Delivered Higher Returns
From 2009 to 2011, departing insider CEOs — those who had been promoted from within the company — delivered annual shareholder returns of 4.4% above local market indexes. That compares with a mere 0.5% annual shareholder return for CEOs hired from outside the company.
Despite This Evidence, Corporations Still Seek Outsiders
Even in the face of this huge performance disparity, 22% of new CEOs in North America were hired from outside the organization. In Europe, the rate was 31%. “These countervailing trends — better-performing insiders and increasing numbers of outsiders — are currently at a crossroads and should be a consideration for any board thinking about making a change,” Booz Senior Partner Ken Favaro said.
The rise in CEO churn is not simply a case of shorter honeymoons for men and women in the C-suite. Senior executives increasingly are challenged to balance competing interests: managing for the long-term health of a company while maximizing short-term returns for shareholders.
Those goals may seem to be compatible, but the challenge resembles that faced by managers in a profession with one of the highest churn rates around: the NFL. When drafting and signing players or installing new football offenses or defenses, head coaches aim to build strong teams that can stay in the competitive hunt over the long haul.
But owners want to win today — and some are willing to mortgage the future to get to the Super Bowl now. For example, since Daniel Snyder acquired the Washington Redskins in 1999, the team has had seven head coaches but only three winning seasons. The Redskins have made the playoffs three times in those 13 seasons and have won just two playoff games.
Still, the $1.56 billion Redskins franchise has the second-highest valuation among the 32 National Football League teams, according to Forbes. And the team’s annual operating income has averaged $76 million over the past decade.
Granted, professional football’s unforgiving, performance-driven culture places it on the bleeding edge of top-executive churn (it also explains the insider’s joke that “NFL stands for ‘Not For Long’”). But for myriad reasons, some major public companies seem to have an affinity for more frequent change at the top than others.
Here are three companies that know a lot about CEO churn:
Hewlett Packard — Six CEOs Since 1999
In the first 60 years of Hewlett Packard‘s (NYSE:HPQ) life, the company had only four CEOs: Bill Hewlett and Dave Packard were the first two, followed by longtime insiders John Young and Lew Platt. But when Platt retired as CEO in 1999, HP picked its first outsider to head the company: former AT&T (NYSE:T) executive Carly Fiorina.
Industry insiders identified her hiring as the beginning of the end of HP’s people-centric business model, known in Silicon Valley as The HP Way. Fiorina, whose $25 billion merger deal with PC rival Compaq a week before 9/11 triggered a proxy battle with one of Hewlett’s heirs, was ousted in February 2005. The deal failed to deliver the shareholder value Fiorina had promised.
CFO Robert Wayman stepped in as interim CEO until HP hired NCR (NYSE:NCR) executive Mark Hurd a few months later. While Hurd succeeded in turning the company around — and HP stock went on a tear during his five-year tenure — he resigned in August 2010 over sexual-harassment allegations. HP eventually said Hurd had violated its business-conduct standards but not its sexual-harassment policy.
CFO Cathie Lesjack served as interim CEO until HP hired Leo Apotheker, a former CEO of German enterprise software leader SAP (NYSE:SAP), in late September. He lasted just 11 months.
By this time, major rifts among HP board members were being reported. Many tech insiders considered Apotheker, who was hired without meeting most of HP’s board members, an odd fit from the start — a software guy tapped to lead a hardware giant.
Three earnings misses and the pricey $10 billion purchase of software provider Autonomy paved the way for Apotheker’s early exit.
Now at the helm is former eBay (NASDAQ:EBAY) CEO and California gubernatorial candidate Meg Whitman, who came aboard last September. She has a tough road ahead, but she’s already been shaking things up.
Yahoo — Five CEOs Since 2007
Terry Semel, who had spent 24 years at Time Warner’s (NYSE:TWX) Warner Brothers unit, became Yahoo’s (NASDAQ:YHOO) CEO in 2001. Over the next six years, Yahoo paid him nearly a half-billion dollars. Shareholder ire over his compensation and the stock’s sluggish performance compared with rival Google (NASDAQ:GOOG) led to Semel’s resignation in early 2007.
Yahoo co-founder Jerry Yang took over but soon faced congressional scrutiny for handing over emails from journalist Shi Tao’s Yahoo account to the Chinese government — a violation of privacy that eventually landed Shi in a Chinese prison. Investors were more dismayed by Yang’s management missteps, including his rebuff of Microsoft’s (NASDAQ:MSFT) May 2008 acquisition bid at $33 a share — nearly three times Yahoo’s share price at the time.
Yang handed the baton to former Autodesk (NASDAQ:ADSK) chief Carol Bartz in January 2009. Although Bartz made plenty of changes — cutting staff and services — she was ousted last September because she hadn’t delivered the revenue growth the company had expected.
Yahoo’s CFO, Timothy Morse, served as interim CEO until the company hired Scott Thompson, former president of eBay’s PayPal unit, in January 2012. Alas, Thompson was “not for long,” either: He resigned in May in the wake of a flap over his academic credentials. The company’s global media chief, Ross Levinsohn, currently serves as Yahoo’s interim CEO.
American International Group — Four CEOs Since 2005
CEO churn is a recent development for American International Group (NYSE:AIG), which was run by founder Cornelius Van der Starr from 1919 to 1968, when he tapped Hank Greenberg for the top job.
Greenberg’s tenure went well until 2005, when he was forced out due to a $1.7 billion accounting scandal and replaced by Martin Sullivan. The financial crisis felled Sullivan, who resigned in June 2008 amid controversy over AIG’s $85 billion government bailout.
He was replaced by former Citigroup (NYSE:C) executive Robert Willumstad, whose three-month tenure was highlighted by a trip to Capitol Hill to explain the company’s stunning underperformance to a government oversight panel — the shares had lost more than 95% of their value in two years.
Edward Liddy took over for Willumstad in September 2008 and promptly got into hot water over executive bonuses and a controversial $460,000 retreat for top insurance salespeople. The AIG board then split up the chairman and CEO jobs between former Campbell Soup (NYSE:CPB) Chairman Harvey Golub and ex-MetLife (NYSE:MET) CEO Bob Benmosche.
Golub moved on in July 2010, characterizing his relationship with Benmosche as “ineffective and unsustainable.” Turnaround guru Steve Miller took over the chairman’s job, and Benmosche is still CEO.
The bottom line: The Booz study, in addition to anecdotal evidence, shows that the tenure of top CEOs is getting shorter and more intense as boards and shareholders demand better performance faster. While this mentality makes CEOs more accountable for the company’s short-term performance, this executive churn also results in increased stock-price volatility and can wreak havoc on corporate culture.
At the end of the day, CEOs must find a way to keep one eye on building the team of the future and the other on winning this year’s playoffs.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.