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The lower dismissal rate signals improvement in the broader U.S. economy
Fewer CEOs are getting the axe, and that could be good news for all business leaders as the U.S. economy continues to improve. In 2014, involuntary and disciplinary CEO dismissals at Standard & Poor’s 500 index companies declined to their lowest level since 2005, according to the
2015 edition of
CEO Succession Practices, recently released by The Conference Board, the New York-based business leadership organization.
Every year, analysts for The Conference Board examine CEO turnover at the world’s largest corporations, and they found that during 2014, less than 16 percent of those job losses were due to involuntary discharges. The 2014 dismissal statistics show a considerable decline from 23.8 percent in 2013 and 29.4 percent in 2012.
“Over the years, monitoring CEO turnover events has allowed The Conference Board to keep a finger on the pulse of the top business leadership in the country. The lower dismissal rate found this past year is, at least in part, a function of the marked signals of improvement in the broader U.S. economy,” said Matteo Tonello, managing director of corporate leadership at The Conference Board. “The softer rate for 2014 was also foreseeable in light of the high turnover reported by S&P 500 companies in the last few years, when approximately one out of four departing CEOs was dismissed by the corporate board of directors.”
In addition, the analysis revealed that CEO successions involving an immediate joint appointment of the incoming chief executive as corporate board chairman continued to decline. According to The Conference Board researchers, this decline in CEO appointments to board chair indicates that independent board leadership is making strong “inroads even among the largest companies.”
Only 8 percent of CEO successions in 2014 involved an immediate joint appointment as board chairman, which was down from 9.5 percent in 2013 and 18.8 percent in 2012. Based on the review of 2014 succession announcements, 34.7 percent of departing CEOs remained as an executive or nonexecutive board chairman for at least a brief transition period, typically until the next shareholder meeting.
“The decline in the immediate joint appointment of incoming CEOs as board chairman means that boards must discuss the ongoing role of departing CEOs,” said Jason Schloetzer, an assistant professor at Georgetown University’s McDonough School of Business and a co-author of The Conference Board report. “Departing CEOs often remain on the board as chairman or director, serve as special advisor to the incoming CEO or consultant to the company, or simply leave the company.”
The report included a historical comparison of the 2014 CEO successions with data dating back to 2001. In addition to analyzing the correlation between CEO succession and company performance, the report examined age, tenure and the professional qualifications of incoming and departing CEOs. According to officials at The Conference Board, the following are the key findings of the succession report:
• Representing a significant shift, the majority of public companies now delegate CEO performance oversight to the compensation committee of the board of directors.
• Policies that permit retaining a departing CEO on the board are waning in popularity, as companies become more sensitive to board independence and to the risk of undermining the new leadership.
• Among the best performers in the S&P 500, the probability of CEO succession surged in 2014, reversing the declining trend of the last few years.
• A generational change in business leadership appears to be taking place and, in 2014, older CEOs (age 60 and above) were three times more likely to leave their post.
• The rate of CEO succession had significant variation across industry groups during 2014, presumably reflecting the soft financial performance of some sectors vulnerable to uncertainties in the consumer market and controlled energy production.
• More stable economic conditions and the improved corporate performance of the last couple of years have halted the declining trend in average CEO tenure observed by The Conference Board in the first decade of the century.
Bill Leonard is an online editor/manager for SHRM.
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