CEO turnover remains high at World’s Largest Companies.

Global CEO departures have leveled off at a high plateau, and less than half of CEOs leaving office in 2006 departed under normal circumstances, according to the sixth annual survey of CEO turnover at the world’s 2,500 largest publicly traded corporations released today by management consulting firm Booz Allen Hamilton. The study found that corporate boards are quicker than ever to replace underperforming CEOs, as they focus more on grooming in-house leaders and turn to outsider and interim CEOs less often as outsider results continue to disappoint.

For the last six years, Booz Allen’s study of CEO turnover has charted the emergence of a more demanding environment for CEOs and boards by examining the linkages between CEO tenure and corporate performance, comparing CEO turnover in major regions and industries.

The firm’s study, “CEO Succession 2006: The Era of the Inclusive Leader,” is being published in the Summer 2007 issue of strategy+business, Booz Allen’s quarterly thought leadership magazine, on newsstands June 1.

Among the findings:

– From 1995 to 2006, annual CEO turnover has grown 59%; in that same period, performance-related turnover increased by 318%. In 1995, one in eight departing CEOs was forced from office – in 2006, nearly one in three left involuntarily.

– As Booz Allen predicted in last year’s study, the CEO turnover wave has crested in every region of the world. Globally, 357 CEOs (14.3%) at the 2,500 largest public companies left office in 2006, a 1.2 percentage point decrease from 2005.

– While merger-related departures increased in the past year, both regular and forced succession rates decreased slightly — from 7.9 to 6.6 percent and 4.8 to 4.6 percent, respectively – though those rates are still significantly higher than the levels of the early 1990s and 2000s.

– In 2006, turnover in North America, Japan and the Asia-Pacific region declined from the 2005 level. Although Europe experienced a slight increase over 2005, CEO turnover remained well below its 2004 peak.

– Performance-related turnover fell slightly in 2006, but remained high – 32% of departing CEOs were forced to resign because of either poor performance or disagreements with the board.

CEO departures due to M&As and buyouts increased in 2006, and the exiting CEOs delivered superior performance for investors.

– 22% of all CEO departures in 2006 resulted from mergers or buyouts, compared to 18% in 2005, with North America and Europe experiencing their highest levels of M&A activity.

– In 2006, CEOs whose companies were acquired delivered investor returns that were 8.3% per year better than a broad stock market average, compared to 5.3% for those who retired normally.

– Exiting via a merger can be an attractive strategy for outsider CEOs following a successful turnaround, taking advantage of their strong upfront restructuring skills. Globally, 17% of CEOs who rose from within the company saw their tenures end in a merger, but 27% of CEOs hired from the outside departed this way.

– All outsider CEOs studied who sold a company they led also sold any additional companies where they became CEO.

Booz Allen examined nine years of CEO succession data, and identified two fundamental shifts in the ways corporate boards address CEO selection and oversight: They are becoming less tolerant of poor performance, and they are increasingly splitting the roles of CEO and chairman and recruiting chairmen who have not previously served as a company’s CEO. “It’s clearly time to say goodbye to the age of the imperial CEO,” said Steven Wheeler, Senior Vice President at Booz Allen. “Welcome to the era of the inclusive CEO, who embraces and reflects the concerns of board members, investors and other constituencies.”

Additional Study Findings

– Boardroom infighting is taking a higher toll on CEOs. The number of CEOs leaving because of conflicts with the board increased from 2% in 1995 to 11% between 2004 and 2006. In Europe, boardroom power struggles drove 22% of CEO departures in 2006. “Boards are flexing their muscles when dealing with chief executives who lack a path to future growth,” Mr. Wheeler added. “This increasing conflict is heightened by activists who demand board seats, launch proxy battles and mobilize shareholders to force changes.”

– Inclusiveness is the new critical CEO survival skill. “Give board members a voice in developing strategy, if you want to retain their confidence,” said Mr. Wheeler. But prior success is no key to CEO survival. 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.

– CEOs are staying in office longer. Average CEO tenure increased to 7.8 years globally in 2006, with CEOs in North America averaging 9.8 years on the job. Asia-Pacific reached its longest-ever average tenure of 9.5 years; only Europe experienced a decline to 5.7 years. The age of departing CEOs dropped to a record low of 54.5 in Europe, suggesting that CEOs in that region are still under tremendous pressure.

– The hiring of outsider CEOs has peaked. Globally, the proportion of departing outsider CEOs grew from 14% in 1995 to 30% in 2003, declining to 18% in 2006. The study also found that selection of an outsider produces a big downtick in stock price, while selection of an insider triggers an uptick.

– CEOs who deliver below-average investor returns don’t remain in office long. In 2006, a CEO who delivered above-average returns was almost twice as likely as one delivering sub-par returns to remain CEO for more than seven years. In 1995, however, underperforming CEOs stayed in office as long as high performers.

– A merger-related CEO change brings a big boost to stock price, but CEO succession has a limited impact on stock price outside mergers. The study found that annualized returns to investors for merger-related successions are 117% greater than average in the 30 days before a change in CEO is announced, although some of this increase reflects the merger premium. By contrast, announcing a chief executive change in North America in a non-merger situation produced a slight positive effect (3.8% better than the average return) when a company has been performing poorly for two years and a negative effect (10.2% worse than average) when the company has been doing well.

– Independent chairmen are best. Globally, investors enjoyed the highest returns relative to a broad market average when the chairman was independent of the CEO, compared to when the CEO also held the title of chairman, or when the chairman was the prior CEO. In 2006, all underperforming CEOs in North America with long tenures had either held the additional title of chairman or served under a chairman who was the former CEO.

– CEOs who had formerly served as chief deliver worse returns to investors. Outsider CEOs who had previously served as the CEO of a publicly traded company delivered slightly worse returns to investors in eight of the nine years studied, than CEOs who rose from within the company. “As boards realize that experience as a CEO doesn’t predict future success, the proportion of prior CEOs will drop off,” said Mr. Wheeler. “Most boards today have at least one internal candidate ready to take the helm.”

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