Why aren't more CEOs getting fired?

Companies are failing to sack their CEO even if they're going to the dogs, according to new research...

Last Updated: 31 Aug 2010

A study by consultancy Booz Allen & Hamilton has discovered that relatively few companies are dismissing their CEO even in the wake of poor short-term shareholder performance – in fact, CEOs of companies ranked in the lowest-performing 10% face a measly 6% chance of getting the boot in the next year. Good news for all those bosses who have seen their share price tank in the last few months, but probably less good if you’re a shareholder at one of these laggards.

Despite the recent economic turmoil, just 4.2% of CEOs were given their marching orders in 2007, equivalent to about a third of those who left their roles during the year. This might sound low (and it was actually slightly down on the previous year), but according to Booz it’s still double the long-term average, which for the ten years under consideration was 2.1% (in the 1990s, it was actually nearer 1%). Booz reckons this is due to a greater focus on corporate governance and increased shareholder activism, particularly in Europe.

So why aren't companies more inclined to part ways with their CEO? One possibility might be a lack of decent internal candidates – it’s hard for the CEO to move on if there is no obvious replacement, as M&S has discovered recently (Tuesday’s departure of Arun Sarin provides a much better example of how to do succession planning). Sure enough, Booz found that boards in Europe and North America continue to hire outsiders (they accounted for 20% of all appointments last year), even though historically they tend to perform worse than those promoted from within - particularly in the UK, for some reason.

Another problem – particularly in the US – is that there aren’t always enough curbs on the top dog’s power. CEOs that also have the chairman job are much less likely to be given the boot – presumably because there aren’t enough strong voices speaking up against them in the boardroom. Since this arrangement is much more common across the pond, it’s no wonder US CEOs stay longer in the job and are less likely to be sacked.

The survey also revealed that telecoms is the least secure industry for CEOs, with an average CEO turnover of over 21%. Sarin’s tenure as Vodafone boss may have lasted slightly less than the six-year average, but at least he has the satisfaction of jumping rather than being pushed...

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