As the year comes to a close, 2005 will be marked as a leading year of Chief Executive Officer (CEO) turnover.[1] With
1,100 CEOs having already left this year, departures have already
exceeded the previous high set in 2000 when the dot-com bubble burst.[2] The
trend is a bit surprising as the economy and corporate profits have
both been on an up swing this year. While it might be easy to attribute
the exodus rate to the impact to the pressures of compliance with
Sarbanes-Oxley, there are other factors that seem to provide a better
rationale for this year’s trend.
It should be noted that the majority of CEO departures this year have been voluntarily. In October, one of the highest departure months with 96 exits, only 5 CEOs left as a result of corporate scandals.[3] Hence, the majority of this year’s increased rate is not attributable to executives being forced out. Industries
with the highest turnover rates include manufacturing,
telecommunication, healthcare, technology, and business services. [4] It seems that many executives just find life at the top as being to stressful. Frequently, these individuals either retire after stepping down or continue with the company, but as paid consultants.[5]
An explanation for what could be happening is that companies are now moving past restructuring and toward growth opportunities. As a result a different type of leader is now needed. As the economy has grown over the last eight quarters companies are not finally convinced that the good times will continue. Consequently
companies are now looking for executives that can not just stabilize
the firm, but “capitalize on the economy’s growing potential.” [6]
The type of CEO that can grow a company is much different from the type that is needed in an economic downturn. The
characteristics and the strategies to succeed in a recession are quit
different from those needed in a booming economy and the CEO has to be
able to switch tactics or leave.[7] The CEO who kept the company afloat may not be the most effective executive in times of growth.[8] Unlike the past, the idea of a life long CEO has been replaced with the “ephemeral” CEO.[9] There is a focus on making number or moving on. Thus,
while most CEO’s technically left voluntarily, many may have been
forced out due to under performance, choosing to take a sizable
severance package rather than risking further shareholder scrutiny. Five years has become the limit for producing positive results.[10] The long term fifteen year goal is now much longer than companies are willing to wait.
The reaction of shareholders reflects this explanation of CEO departures.[11] Stock price often reflects how shareholders feel about the change. An increase in stock after a new executive is named indicates how shareholders view the direction a company is pursuing. Now
the economy is back on track, and having learned the lesson from the
dot-come bubble, shareholders are willing to take a bit more of a risk.
Today’s CEOs average just under nine years in their positions.[12] This
is longer than the global standard though it still seems short by
America’s historical standard, leading the world in CEOs with over
twenty years. However, it can take three to five years before a CEO will be able to implement their own strategies and see the results.[13] Despite this, there is a concern that the longer a CEO is with a company the more risk adverse they may become. In a period of growth, this is detrimental to a corporation and can hurt the long term value of the company. As a recent report note, the challenge for CEOs is to create “short-term wins that don’t hurt the company in the long run.[14] That, of course, is easier said than done.”
Hence, the reason for CEO turnover does not look to be scandal. Instead, it looks to be purely driven by the economy. As companies become more confident in the markets and that they will remain stable, they have shed their conservative CEOs. Heading
back into the growth game a little riskier and a little wiser, it will
be interesting to see if the newly appointed CEOs will in fact increase
growth and if they will be here come 2010.
[1] Record 1,100 CEOs Gone So Far in 2005, Nov. 8, 2005, http://brumley.com/news/newsBusiness.htm
[2] Id.
[3] Id.
[4] Stephen Taub, Record for CEO Turnover in 2005, http://www.cfo.com/article.cfm/5134282/c_5134299?f=home_todayinfinance nov. 9, 2005.
[5] Record 1,100 CEOs Gone So Far in 2005, Nov. 8, 2005, http://brumley.com/news/newsBusiness.htm
[6] CEO Turnover Keeps Rising, June 8, 2005, http://brumley.com/news/newsBusiness.htm
[7] CEO Departure on the Upswing, July 12, 2005, http://brumley.com/news/newsBusiness.htm
[8] CEO Turnover at Highest Rate since 2001, Mar. 7 2005, http://money.cnn.com/2005/03/07/news/fortune500/ceo_turnover/index.htm
[9] Diane Stafford, Study: CEOs Must Shape Up the Company or Ship Out, The Kansas City Star, available at http://www.kansascity.com/mld/kansascity/business/12053542.htm
[10] Id.
[11] Kevin Sweenwy, Business Reporters Focus on CEO Turnover, Mar. 16, 2005, http://www.businessjournalism.org/content/6336.cfm
[12] Diane Stafford, Study: CEOs Must Shape Up the Company or Ship Out, The Kansas City Star, available at http://www.kansascity.com/mld/kansascity/business/12053542.htm
[13] Id.
[14] Id.
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