Job Security Wanes in Executive Suites

It's getting shaky at the top.

More than 15 percent of the world's 2,500 biggest companies lost their chief executives last year, and only half of the departures were voluntary, according to a study that will be released by the consulting firm Booz Allen & Hamilton today.

The number of chief executives who left -- 383 -- was up slightly from last year and the 15.3 percent turnover rate was the highest recorded in the 10 years Booz Allen has studied the matter. Turnover was highest in Japan, with 19 percent, and in North America, where the 16.2 percent turnover rate was the highest since 2000.

"We think this level of turnover is here to stay," said Paul Kocourek, a Booz Allen senior vice president and an author of the study. "Boards are much more activist, and they are not going to tolerate poor performance. . . . If your [company is] performing at 2.5 percent below the Standard & Poor's 500 index, you are at risk."

The statistics from North America tend to bear that out. Thirty-five percent of chief executives who departed in 2005 were forced out -- the most ever recorded in the survey -- compared with 44 percent who left voluntarily and 25 percent who lost their jobs because of mergers. Among the high-profile departures last year were Harry C. Stonecipher, forced out at Boeing Co. after a scandal; Hewlett-Packard Co.'s Carly Fiorina; Walt Disney Co.'s Michael D. Eisner, and Morgan Stanley's Philip J. Purcell.

Retirements and other voluntary departures have not changed significantly since 1995, but the number of chief executives forced out for performance-related reasons has more than quadrupled, Kocourek said.

Much of the change seems to stem from regulatory changes that have emphasized director independence and made them feel more personally responsible for company performance, as well as the growing willingness of large investors to challenge company strategies when share prices are lagging.

High chief-executive turnover can have both good and bad consequences.

"It's very good. It creates a culture of accountability," said Charles M. Elson, who directs the Center for Corporate Responsibility at the University of Delaware. "Boards who remove CEOs are to be congratulated. They're doing their job. . . . In the old days, there were lots of reasons to remove [corporate leaders], but boards dominated by CEOs didn't do it."

For employees, change can create uncertainty. "CEO turnover is often coupled with broader organizational change along the lines of layoffs and selling businesses and changing strategies," said Paul Oyer, an associate professor of economics at Stanford University's business school. "When CEOs turn over, that's both a problem and an opportunity."

On the other hand, high turnover could make chief-executive jobs less attractive. "If you ask CEOs to take the risk of having to resign in a fairly public manner . . . people might be less willing to take the job and want higher compensation, which means you shrink the pool," said Constance E. Helfat, a strategy professor at Dartmouth's Tuck School of Business who studies chief-executive turnover.

Some analysts wondered whether the problem will be exacerbated if the Securities and Exchange Commission adopts a proposal to require more disclosure of executive perks. If it does, they said, top business executives might decide to work for a privately held company or a venture capital firm rather than a publicly traded firm, to avoid the risk of public scrutiny.

The Booz Allen study also looked at the succession process and concluded that over the short term, companies that brought in new chief executives from the outside did better than those that promoted someone from the inside. But insider chiefs tended to serve longer and provided better shareholder return over the long haul.

Others who have studied the matter said the Booz Allen study may overstate the benefits of outsiders, even in the short term, because outsiders are more likely to inherit companies that are in bad shape where investors are primed to respond positively to any kind of change. Helfat said that in her study of chief executives during the first three years of their tenure, she found that once she adjusted for the company's previous performance, outsiders and insiders performed, on average, equally well. Outsider chiefs were more of a gamble, she said, because they were more likely to do spectacularly badly or spectacularly well, while insiders tended to stick closer to average.