CEO Succession 2003: The Perils of “Good” Governance

Booz Allen Hamilton’s annual study of CEO succession aims to identify patterns in the relationship between chief executive officer tenure and corporate performance that can provide insights for managers, board members, and their advisors. Following the methodology used in previous years, we identified chief executives at the 2,500 largest publicly traded companies in the world (based on market capitalization as of January 1, 2003) who left their positions during 2003. Using the companies’ public statements, as well as our review of press coverage, we determined whether a succession was voluntary or induced.

We used public data sources to help analyze these executives’ entire tenure as CEOs, including personal demographic data (such as age at ascension and departure) and the financial performance of the companies.

In assessing performance, we measure total shareholder returns (TSR), including dividend reinvestments, and compare individual company performance with regional industry performance for the period of a CEO’s tenure. A shareholder return of 1 percent therefore means that the CEO class in question – retiring outsiders, for example – delivered TSR 1 percentage point greater than the entire relevant market.

Thus, our study reviews the entire careers of CEOs at the point of their departure. In effect, we look back on the professional lives of each year’s “graduating class” of CEOs, and, in the aggregate, try to determine factors that contribute to the success of some and the failure of others. To tease out information that might illuminate the relationship among boards, management, and corporate performance, this year, for the first time, we included data about whether CEOs held the title of chairman of the board throughout their tenure; whether they were named chairman during the course of their service; or whether they never held the title.

The long-term trend in CEO turnover reinforces the main conclusion reached in our previous succession studies: Aggressive shareholder capitalism has become the defining characteristic of 21st-century capitalism. The days when investors “hired” professional managers to run the firm and left it to the board of directors to oversee them – the de facto corporate governance model for much of the 20th century – now seem to be gone for good.

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