CEOs Shown the Door
By Will Boye, Senior Editor

A study released this week by consulting firm Booz Allen Hamilton found that CEOs are being forced out at a record rate for performance-related issues. The study, titled "CEO Succession 2002: Deliver or Depart," evaluated CEO turnover at the 2,500 largest publicly traded companies in the world and found that 39 percent of last year's successions were involuntary and performance-related--up from 2001, when that figure was 25 percent.

The study also revealed that CEO turnover has increased internationally, especially in the Asia/Pacific region, which accounted for 20 percent of the 253 successions that occurred around the world last year. The results in countries such as Japan, where the forced turnover rate increased by a factor of 10 from 2001, was probably a result of a shift to Western-style governance processes, according to the study's authors.

"Once you say that you are watching out to a heightened degree for shareholder protections, you start to be driven by a new set of benchmarks," said Holly Gregory, a partner in the corporate governance group at Weil, Gotshal & Manges. In Japan's case, she said, where executives have failed to meet these objective, financial benchmarks, scrutiny has increased. "That's going to result in change."

North America accounted for 48 percent of all successions worldwide in 2002, down from 64 percent the previous year.

The study also found that boards are judging CEOs more strictly: CEOs who were dismissed last year had underperformed retiring CEOs by 6.2 percentage points in terms of median shareholder returns. In 2001, an 11.9 point shortfall precipitated a firing, and in 2000, it was a 13.5 point shortfall.

Chuck Lucier, one of the study's authors, said that boards have traditionally served two equally important roles: the watchdog role, in which the board reviews financial information and removes poorly performing CEOs, and the counseling role, in which the board works with the management team to improve its effectiveness. In the past two years, Lucier said, boards have focused almost exclusively on the former, working to ensure the accuracy of company financials and oust poorly performing executives.

"One of the lines that we'll have to walk as we go forward is continuing to expect boards to perform both roles," Lucier said. The boards that have been put in place in the wake of the Sarbanes-Oxley Act are more sensitive to financial misdeeds, Lucier said, and it may take three or four years before they find the appropriate balance.

"I think it will take a while before some of those memories fade," he said, referring to the rash of corporate scandals that have reshaped the corporate governance landscape. Until then, he added, the rate of forced succession will continue to rise.