Booz Allen Hamilton: Half of all Chief Executives are dismissed from office, but those who can deliver results are in greater demand than ever

The year 2005 saw one in seven companies around the world make a leadership change, compared with only one in eleven a decade earlier. These dismissals of a company's top executives were almost always the result of one thing: angry investors.

Why is this occurring? Booz Allen Hamilton's study found that one of the biggest reasons was a change in the laws governing corporate control in response to massive corruption cases of corporations in North America and Europe. The result has been board of directors eager to shift the blame to the CEO, creating a conflict that usually ends in dismissal of the chief executive.

'This will have a profound affect on the Middle East,' said Karim Sabbagh, Vice President of Booz Allen Hamilton. 'Though the governance changes in America and Europe don't apply directly on this region of the world, they affected all major corporations. And any changes of this magnitude are going to have dramatic affects on every part of the world where a corporation has a presence, and that includes the Middle East. Since the UAE is more directly involved in the world of business than other areas of the Gulf, there is going to be a considerably stronger impact.'

The study by Booz Allen Hamilton came away with some surprising observations:


• Dismissal was so common in the 2005, that a CEO prematurely leaving was just as likely to occur as the CEO's leaving due to retirement. Fully half of CEO departures in both 2004 and 2005 came from dismissals. These dismissals were usually the result of poor performance or mergers.


• Another observation of the study was the fact that 'repeat chiefs' were a growing factor. 'Repeat chiefs' are defined as CEOs who were now heading their second or third company. More than one out of eight dismissed CEOs had also been the CEO of another company.


• Outsider CEOs, i.e. CEOs hired from outside the company, tended to explode in their first two years in the company, and then peter out rapidly. During their initial successful two year period however, they produce four times as high of returns as a CEO from who came from within the company. But these returns are only temporary: an insider CEO will produce better results over the long term.


• CEOs who were never chairmen previously performed better than those who were.


• The former CEO should not be allowed to remain as chairman. The CEO who is selected to work under that chairman usually performed dismally.


• North America, Europe and most of Asia (excluding Japan) all saw record turnover of their CEOs in 2005 or 2004.

The rate of turnover for the world was 15.3 percent in 2005, which was 70 percent higher than the rate ten years ago. In North America, Europe and Japan, the biggest reason for that turnover was that they were forced out, either because of a merger or because of poor performance.

'A large reason for this strong rate of turnover has been due to the anger of shareholders,' said Paul Kocourek, Senior Vice President with Booz Allen Hamilton in San Francisco. 'Because shareholders in the US and Europe have been given through legislation increased abilities to remove their CEO in the case of poor performance, we are seeing these shareholders acting on their newfound abilities. That means more CEO dismissal, and it isn't going to slow down anytime soon.'

The firing of underperforming CEOs quadrupled in a 10 year period ending in 2005. It represents a remarkable change for companies. The position of CEO was seen as a steward for a company. The position was a reward for years of hard work, and the person who earned the position was meant to stay on and steer the company through both the good and the bad. The CEO would only leave when he reached his retirement. And even then he might stay on board in some capacity, usually as chairman. This is no longer the case.

Instead a CEO is very likely to be removed from his position if the company does not perform well during his or her tenure. There's a catch however; sometimes the CEO isn't given a long enough chance to right the ailing ship.

The authors of the study concluded from the data that there are several things a corporation can do in order to avoid problems related to CEO performance:


• If you hire an insider CEO, performance will be poor for the first five years, but will become good over the longer term. Because of this, you should not hastily fire an insider CEO.


• As stated above, do not make the former CEO chairman of the company. A new CEO will not be able to function well under the chairman and will struggle for autonomy.


• If you bring in an active CEO from another company, your company's performance may or may not do well. There isn't enough data yet to see whether this strategy works.


• If you bring in an old former CEO from another company, you will initially have strong performance, but it will later deteriorate. Performance will also not be as strong as hiring a first time CEO from outside the company.


• If you bring in a first time CEO from outside the company performance will improve only for the first five years and then deteriorate. The best bet is to have this CEO only for a short while before removing him or her.

'Hiring a CEO from outside the company, with or without experience should only be seen as a stop-gap,' continued Kocourek. 'During this period the company should be grooming this person's replacement from within the company itself.'

The survey's authors offer some hope for beleaguered CEOs: While it is harder than ever to avoid dismissal in your job, it probably isn't getting any worse. The numbers are already starting to plateau. The bad news is that they certainly aren't getting any better.

What does the future hold? According to the study's authors probably more governance regulation on the part of Western governments. With more regulation comes increased scrutiny on CEO behaviour and laws created to give others more power over the CEO.

And that will mean an increasingly active role for the board of directors. Boards are seen as the natural recipient of increased power over a CEO, so when trouble comes, the boards will be forced to react and punish.

Already with growing numbers of CEOs being dismissed, boards have had their hands full finding qualified replacements. But because many laws now mandate that boards be made up of independent outsiders, rather than insider employees, boards will probably enjoy their new powers over the CEO.

'The trend toward more regulation of CEOs will be a good thing in the end,' concluded Karim Sabbagh. 'While many will complain of short term instability because of high turn over, if the conclusions from this study are realised and utilised by boards of directors throughout the business world, we'll still see a considerable number of dismissals but many of those dismissals will be deserved, and corporate performance will improve.'