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The rate of CEO change

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If it seems like the revolving door at the top of Corporate America is spinning faster these days, it is.

Consulting firm Booz & Co. released its 12th annual study on CEO succession Thursday, which shows that 14.2 percent of the world’s 2,500 largest companies replaced their CEOs last year. That number is up from 11.6 percent in 2010, and the increase brings the level of CEO turnover back up to historical averages. It also may say something about how boards of directors are feeling about the economy, says Gary Neilson, a senior partner with Booz. During a recession, boards focus on “hunkering down and getting through it,” he says. But once the business environment appears a little brighter, they start to think more about making changes.

The study, which looks at average CEO tenure, the performance of insider and outsider CEOs, and how many CEOs also hold the chairman’s title, examined the differences between turnover rates in large versus small companies for the first time this year. As one might expect, the study found that the largest 250 companies in the study had a slightly higher level of turnover than the smaller ones. “There’s a lot of public scrutiny for these large companies,” says Neilson.

That’s just one piece of evidence that the pressures on boards of directors by shareholder activists and other investor watchdogs are having an effect. Here’s another: The number of CEOs being appointed to combined CEO-chairman roles has dwindled to just 18 percent of new CEOs.

When Booz began the study in 2000, 40 percent of new CEOs were also handed the chairman’s role. “Boards of directors are beginning to flex their muscles,” says Sydney Finkelstein, the associate dean of executive education and a professor at Dartmouth’s Tuck School of Business. Even if studies have shown that separating the CEO and chairman roles makes “very little difference to the bottom line,” Finkelstein says, “it has a lot of symbolic value” in an era that values director independence.

What’s less encouraging is that companies appear to be increasingly turning to CEOs from outside their corporations, despite evidence that inside CEOs produce higher shareholder returns. In 2011, the Booz study showed, 22 percent of new CEOs were selected from outside the company’s ranks, a level consistent with the two years prior but up from 14 percent in 2007.

Meanwhile, Booz’s study found that not only do CEOs recruited from within outperform their regional market index by a median 4.4 percent (compared to just 0.5 percent for outside CEOs), they were far less likely to be forced out of their jobs. For outside CEOs between 2009 and 2011, nearly 35 percent of non-M&A CEO changes were forced, while for insiders this proportion was just 18.5 percent.

Over the last 12 years, the study reports, insiders have stayed in their jobs two years longer than outsiders, on average, and are nearly six times more likely than outsiders to serve a company for nine or more years. Overall, however, it appears that Corporate America may have something of a seven-year itch — Booz’s study found that was the median tenure for all North American CEOs between 2009 and 2011.

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