Worth reading: Booz & Company CEO Succession Survey, “Stability in the Storm” by Per-Ola Karlsson and Gary L. Neilson

A Leadership Test

Leaders are judged on how they deal with their most significant challenges.

As American Express CEO Ken Chenault said on the cover of the November, 2007 Fortune, “We have to remember that reputations are won or lost in a crisis.”

Each year the consulting firm Booz & Company studies CEO turnover among the 2,500 largest public companies in the world.  Their report, published in Booz’ online magazine Strategy+Business, is worth reading, and provides not merely statistical data and trends, but also insights into the particular leadership challenges facing CEOs today.

The 2008 CEO Succession Survey, published this month, concludes that the financial and economic meltdown that began in the last third of last year is still causing CEO turmoil.  Forced CEO turnover remained high in 2008, but those CEOs who kept their jobs aren’t out of the woods yet:

…experience suggests that boards apply even greater scrutiny to chief executives’ actions and decisions in tough economic times. In many companies, the economic crisis will turn out to have been a leadership test.

CEOs may have been granted safe harbor for the time being, but our view is that some will not weather the current storm, and as boards take stock of their new financial and competitive positions, turn-over will once again rise.

The Survey reports:

CEOs demonstrated remarkable recession resistance last year. Although CEO turnover rose slightly on a global basis, from 13.8 percent in 2007 to 14.4 percent in 2008…. turnover actually declined in North America and Europe, the regions hit first and hardest by the economic downturn. Succession rates in these bruised economies decreased by 0.5 and 1.9 percentage points, respectively — all the more surprising when one considers that Europe and North America had led other regions in CEO turnover in the two previous years.

Record Forced CEO Turnover in Financial Institutions

But the survey also notes that banks and other institutions most affected by the meltdown saw unprecedented levels of forced turnover –18 percent of financial institution CEOs in the sample lost their jobs:

The turmoil of 2008 affected CEO turnover most clearly in certain hard-hit industries: In financial services and energy, for example, forced turnover climbed to record rates in 2008, whereas in more recession-resistant and stable industries, such as utilities, turnover declined from already low levels.

Other significant findings:

• The reasons for CEO departures were remarkably consistent with past years. Of the 361 succession events among the companies studied, 180 were planned (retirement, illness, long-expected changes), 127 were forced (where a board removes a CEO for poor financial performance, ethical lapses or irreconcilable differences) and 54 were prompted by mergers.  By comparison, in 2007, 346 CEOs left their companies; 169 departures were planned, 106 were forced, and 71 followed a merger.
• Financial services and energy led all other industries in turnover rate increases. The financial services industry saw 18% of its CEOs losing their jobs, breaking with the patterns of previous years. The rate of forced successions was 8.8%, more than double the historical rate of 3.4%. Forced turnover in the energy sector also hit a record high, with 5.6 % of its companies’ CEOs ousted, versus the typical 2.7%, as enormous commodity price volatility in 2008 ended the comfort of steady high returns for much of the 2000s.
• Meanwhile, industries that are less sensitive to discretionary spending, such as industrials, utilities, healthcare and consumer staples experienced stable leadership, with turnover rates falling below their historic rates.
• The average age of this year’s incoming CEO class is 52.9, nearly two years older than the average 51.0 years of age, which has held steady over the past decade.
• Nearly 20% of the CEOs studied have had held the top position before, almost double the 9.8% average rate for the 11 years Booz & Company has studied (1995, 1998; 2000-2008). Importantly, 65.6% of new CEOs have run a business, with 18.9% having served as CEOs before, 27.4% serving as business unit leaders, and others who had been regional heads, presidents or chief operating officers.
• In Asia, forced removals nearly doubled from 3.8% to 6.1%; in Japan rates jumped nearly four-fold, from 0.8% to 3.1%.

Seven Actions for New CEOs

How can new CEOs navigate in these challenging times and exercise leadership effectively?

Booz studied the career paths of new CEOs and also the challenges these new CEOs face.  They developed a seven-step action plan for new CEOs.  These seven steps can serve any leader well, in any kind of enterprise:

1. Declare a new day.
   Reset expectations of how the business will work, how decisions will be made (or not made), and how people will be held accountable.  Booz notes that the appointment of a new CEO is a rare opportunity to make much-needed changes in accountability.
2. Establish priorities.
   Set forth the three or four agenda items that will drive the strategic direction of the company over the next several years.  Avoid the temptation to make too many decisions too soon.  Delegate more and second-guess less.
3. Affirm or change the team.
   In the first 60 days, reassure those senior leaders who will make the cut, and deliver the news to those who won’t, even if their successors have not yet been identified.
4. Establish boundaries.
   Very few CEOs are prepared for the onslaught of time and attention from the rank and file.  Everyone wants face time with the CEO.  Only one fifth of the CEO’s day is spent behind a desk; fully 80 percent is consumed in meetings, visits with clients, and symbolic or ceremonial events.  CEOs who flourish set clear boundaries and delegate all but mission-critical tasks.
5. Keep an ear to the market.
   Employees tend to tell the boss what they think he or she wants to hear.  So CEOs need a source of objective counsel.  CEOs should spend time with customers, who are most likely to provide straightforward commentary on the company.  CEOs should also spend time with and get to know suppliers, partners, and the investment community.
6. Get to know the unknown.
   New CEOs get a free pass for the first few months to get a tutorial on the operations of the company.  They should leverage internal authorities and seek outside experts who know the industry and the company.  CEOs should also resist offering their opinion early in discussions, since their initial view is often taken by others to be company strategy.  CEOs should step back in discussion and solicit others’ opinions and views.
7. Engage the board.
   CEOs need to understand the board’s expectations and help to set them.  And they must deliver on those expectations in big ways and small.  CEOS must also go beyond inviting board members to reach out with suggestions.  Rather, CEOs should make a point to meet one-on-one with each board member, at a time, place, and in a manner of the board member’s choosing.

Lessons for Leaders

One of the burdens of leadership is to provide vision, direction, and reassurance in difficult times.

Nine months into the worldwide financial and economic recession, boards are paying attention: leaders are under close scrutiny to demonstrate their leadership skills.  It’s a new environment, one where old ways of doing business are no longer relevant; where CEOs need to be nimble, thoughtful, and accountable.

Wei Ji = Crisis

As the Chinese ideograms that translate into the English word “crisis” suggest, crisis embodies two separate concepts: danger and opportunity.

Boards are particularly attentive to CEOs’ ability to lead in the present crisis, directing energy and resources so that the enterprise benefits from opportunity, and avoids unnecessary danger.

As the year unfolds, we’ll see more and more CEO turnover, as well as successful CEO tenure.  I look forward to next year’s Booz & Company CEO Succession Survey, which will take full measure of the current crop of CEOs.

Fred