Posts Tagged ‘CEO turnover’

RHR International was mentioned today in an article in the WSJ about the recent revolving door for CEOs. Not that this is new. CEOs have been coming and going for some time now. But what was new was that among the 83 CEOs of publicly held companies surveyed, the board seemed to be a greater source of tension than it used to be. Nearly three quarters wish they were included more in board discussions of succession planning.  And as one would expect, the top two threats to their tenure, according to CEOs, were the current economy (39%) and rapid industry change (22%).  However, a third top threat to CEO tenure was strategy disagreements with the board (17%).  As a watcher of  CEO trends, I find it noteworthy that CEOs mentioned disagreements with boards and desire greater collaboration over transitioning.  The disagreements over strategy (spin offs, shedding assets, etc) does seem to be a rising cause for CEO exits these days. Something has changed.  I wonder if the new tension that is developing is because boards are more active now because of the criticism that they were no more than a rubber stamp on CEO activities or if the strategic choices facing boards today are infinitely more complex and disruptive. When no one knows the true answer, there is room for disagreement. CEOs and boards seem to be caught in this new tango.

Another finding which I liked seeing because it provides some hard numbers about something I have observed was that half of CEOs feel isolated and lonely. For this reason, CEOs should reach out to other CEOs in different industries, find mentors or retired CEOs to talk to. It can be debilitating so finding an ear to listen and advise is highly recommended.

CEO reputation is always of interest to me and of course this week has been a cataclysmic and newsy one with the medical leave of Steve Jobs at Apple and Google Eric Schmidt’s relinquishing of the CEO title to Larry Page. 

WIth CEOs on my mind, I stumbled across a research study by Wharton finance professor Luke Taylor who built a model to understand what happens when boards fire a CEO and what holds them back, if anything.  Taylor found that there are two costs to firing a CEO — the severance payment (direct costs including headhunters and other exec departures) and second, what he calls “entrenchment” costs. Entrenchment costs are the personal ties that get severed when board members decide to let a CEO go.”Taylor’s model found that the entrenchment cost per firing was, on average, $1 billion — far more than the $300 million in direct costs.”

One of the downsides to firing CEOs in his model is that more aspiring executives might not choose the CEO track. In past research I have done, I learned that the CEO role was already diminishing in stature due to public scrutiny and stress. The economic problems of recent years have probably dampened that corner suite goal even further. See below.

 His model does, however, predict that if the entrenchment cost went to zero — meaning that sacking a CEO came with only financial costs and no intangible consequences — the annual rate of CEO firings for the S&P 500 would go from 2% to 13%. That would result in a one-time bump in value for the S&P 500 of 3%. Taylor notes that this higher level of firings could potentially cause talented individuals to choose career paths other than those that might lead to a CEO position.

The whole idea of entrenchment costs is fascinating, especially because it is over three times more costly than just severance costs according to Taylor’s research model. The Wharton Leadership article said:

According to Taylor, this remaining $1 billion probably stems from two factors. First, there is a personal cost to board members who terminate the company leader — in the form of the time and stress of making a management change — as well as the loss that directors face in the departure of a business ally or golfing friend. Another contributor may be the fact that the board simply does not care all that much about maximizing shareholder value — at least not as much as keeping a CEO with whom they feel comfortable.

Of course this became more interesting when I read that entrenchment costs depend on company size. For the larger S&P 500 companies, Taylor found that the entrenchment costs were nearly zero. Whew. That was a relief to learn since this research was alarming me – board members hesitating to fire poor-performing CEOs because of their feelings (?) and losing golf  partners (??). I agree with Taylor that the larger the company, the more board members have to lose in their own reputational equity. No one wants to be on those board of shame lists.

Reputation works in funny ways but maybe it works well when it comes to decision-making on large company boards. Sounds like a good thing.

I was sent a column today that recently appeared in BloombergBusinessWeek on the CEO revolving door. It is worth reading because the author, CEO Kevin Kelly of Heidrick & Struggles, argues that perhaps we are giving CEOs too little time to accomplish too much. We expect miracles in the first 100 days and if that is not long enough, we say we will give them another 100 days. By the end of year one, we expect these new CEOs to be turning around the share price, keynoting at Davos and chiseling their strategy into stone tablets. I was just thinking the same because this weekend I read articles about two CEOs’ performance on their first year anniversaries. The two CEOs barely got credit for what they had accomplished. It takes CEOs at least two years to hit their stride, crisis or not. Of course, if they are not working out, it is time for the boot but lets admit it, most incoming CEOs take about one year to change what was not going right in the first place. From months 12 to 24 or 36 months, the best of the rest starts to take hold.

That’s my two cents for the day.

Some random notes on reputation from the past few days….

1. “Green” is having a hard time when it comes to reputation. Greenwashing claims are piling up as more advertisers try to appeal to socially conscious consumers.  According to the U.S. Advertising Standards Authority’s public affairs department, “We received a record number of complaints about green claims last year, which had more than doubled from the year before, to over 300.”  Companies need hard and clear evidence to make statements about their products being carbon-neutral, sustainable, organic, non-toxic, ozone friendly, 100% recycled. The reputation of “green” is quickly losing its power over consumers if it continues to be used irresponsibly. The Financial Times article where I read about this evolution of green’s reputation said that there are certain terms that are more passable than others such as “kinder to the environment,” “ecologically improved,” and “more environmentally friendly than before.”  These might not satisfy consumers and marketers although they may be more credible. More stringent rules are on their way in the U.S .and U.K.  Greenwashing charges against “green” could dilute its reputation altogether if we are not careful.

2. As our research on managing reputations online revealed, executives are very worried about the leaking of confidential documents. Another article I read recently in the Financial Times states that networking security is at greater risk than ever before.  Executives seem aware but will be surprised at how easy it now is to break into company networks and steal information. The CEO of NCC Group, a network security firm, says that his team of “ethical hackers”  has a success rate of 97.8% in hacking into corporate networks.  Not only are wireless networks making it easier to break into corporate networks but so are stolen or lost laptops and devices. I thought it was very cool to read that one of the safety recommendations was for companies to use a “remote device wipe” so that all the data on a lost device could be obliterated on demand.  Sounds very 24 to me (the program with Jack Bauer). After reading this article, I vow to never leave my laptop out on the desk of a hotel room just waiting to be taken. The article says that we should never assume we are safely covered network-wise.  The executives in our study are right to be worried.

3. In today’s WSJ, an article on CEO turnover in the financial sector helps make a point that surfaced in our other recent survey on CEO reputations. We learned that nearly one-half of rising executives (49%) say that they would take a CEO position if offered. We stated that this was good news because positive CEO succession is critical to our nation’s economic recovery. The authors wrote, “ There  aren’t any highly attractive CEO prospects in the financial-services industry. The best players won’t risk their careers going to a troubled enterprise.” Therefore the job number one for companies right now is to increase their leadership development programs and groom rising executives for the long-term.  According to the Booz & Co. terrific survey on CEO turnover, 18% of financial services firms lost their CEO in 2008 and of these, more than half were pushed out. As the WSJ reports, several firms are now looking for CEO replacements – AIG, Hartford, Freddie Mac. The reputation of the financial services sector is in great need of repair and only when we have willing, seasoned and values-driven executives in the corner suite, will we be able to talk about a reputation recovery in the financial services sector.