The recent rise in the turnover rate of CEOs is once again demonstrating the importance of a company’s ability to create effective succession plans for its top executives.
However, it could also be a signal to corporations that boards may be pressured to replace their CEO in the future by disgruntled shareholders who want their concerns met.
According to the Booz & Company twelfth annual CEO Succession Study, 14.2 percent of the world’s largest 2,500 public companies replaced their CEOs in 2011, up from 11.6 percent the year before.
‘Our analysis suggests that it is largely due to the improving economy in many parts of the world,’ the study says. ‘Turnover rates have typically been lower during periods of recession and significant stock market decline. This trend suggests that boards are more likely to keep their chief executive during times of economic uncertainty in order to maintain stability, and are more willing to make a leadership change when economic stability returns and the company outlook improves.’
While it is no doubt true that companies tend to stay with the current CEO in tough times, in the US the swift changeover of CEOs may also be due to growing investor displeasure with the lack of alignment of lagging stock performance and CEO pay. CEO pay is also on the rise, even as the global economy seems not to be improving as fast as most analysts had expected.
CEOs are under more scrutiny now than ever before. They can be pressured to leave because of bad stock performance, failure to lead the company out of a crisis, poor strategic judgment or unacceptable ethics. Boards need to consider the growing number of issues that should be taken into account when selecting their next CEO because chances are they will have to consider making a change in the next few years.
If economies continue to struggle and stock prices remain stagnant, the growing influence investors have gained this proxy season may force companies to go against the trend highlighted in the Booz & Company survey and insist the CEO be removed, even in times of economic uncertainty.