The turnover rate of CEOs hit a record 17.5% in 2018, but a group of executives are holding steady, says consultancy firm PricewaterhouseCoopers (PwC).
PwC in its ‘2018 CEO Success Study’, published on Tuesday, analysed CEO succession at the world’s 2 500 largest public companies.
PwC has been publishing the study for more than 19 years and said the CEO turnover rate was 14.5% in 2017.
Further, the 2018 study showed that, while the median tenure of a CEO was five years, 19% of all CEOs remained in the position for ten or more years.
Despite disruption, intense competition and eager investors, the median tenure within this group of long-serving CEOs is 14 years. PwC said long-serving CEOs performed better and were less likely to be forced out than those with a shorter tenure.
PwC Africa strategy head Jonathan Cawood noted that CEO succession was one of the most important responsibilities of the board of directors, since the CEO is responsible for setting company strategy, driving its execution and “setting the tone at the top”.
He added that many companies were not fully prepared for CEO departures, even though succession planning was one of the board’s main responsibilities.
Too often, boards are caught unprepared when their CEOs step down – whether owing to retirement, leaving under pressure or pursuit of other opportunities.
“Transitions cause uncertainty. When the board is looking to find a suitable replacement, it is most likely that the succession process will disrupt operations, make employees and shareholders nervous, and can fuel negative publicity,” said Cawood.
PwC people and organisation senior manager Anelisa Keke remarked that CEO succession planning was a rising concern, now more than ever.
“CEOs who stay in their role until retirement are becoming the exception rather than the rule. Well-developed and executed succession plans can mitigate the risk of a leadership vacuum when a CEO retires or resigns, which may result in a loss of investor confidence.
“Good succession planning also needs to be supported by appropriate remuneration packages and incentives. According to our recent ‘Executive directors: Practices and remuneration trends' report it is critical for the interactions between the remuneration committee and the nomination committee to be properly coordinated when determining CEO succession planning, and how this plan can influence CEO pay,” Keke explained.
MISCONDUCT TREND
Meanwhile, the study also showed a rise in the share of CEOs who were forced out of their positions for ethical lapses during 2018.
PwC stated that more CEOs were forced out for ethical lapses than owing to financial performance or board struggles – a first in the study’s history. This number rose to 50%, compared with 26% in 2017.
PwC’s study defines dismissals for ethical lapses as the removal of the CEO as a result of a scandal or improper conduct. Examples include fraud, insider trading, inflated resumes and environmental disasters.
“The rise in these kinds of dismissals reflects several societal and governance trends. These include more intervention by regulatory and law enforcement authorities, new pressures for accountability of CEOs, and an increasing propensity by boards to adopt a zero-tolerance stance towards executive misconduct.”
PwC Africa people and organisation head Gerald Seegers said boards of directors, institutional investors, governments, the media and other stakeholders were holding CEOs to a far higher level of accountability for corporate fraud and ethical lapses than they did in the past.
“Our research shows that companies are continuing to improve both their processes for choosing and replacing CEOs and their leadership governance practices.”
OTHER TRENDS
The study also recorded an uptick in the share of CEOs who have international work experience, as well as the fact that there were more CEOs with a Masters degree than in the past.
Among industries, PwC found that turnover was highest in communication services companies (24.5%), followed by materials (22.3%) and energy (19.7%). Healthcare saw the lowest rate of CEO turnover in 2018 at 11.6%.
The share of incoming women CEOs was 4.9% in 2018, which was down from the record high of 6% in 2017.
However, PwC noted the the trend had still been higher since the low point of 1% in 2008.
“Unlike in 2017 when the record high was driven by 9.3% spikes in incoming CEOs in the US and Canada, the largest percentages in 2018 originated in Brazil, Russia, India and China,” the consultancy firm stated.
PwC added that the utilities industry had the largest share of women CEOs, at 9.5%, followed by communication services and financial services at 7.5% and 7.4%, respectively.