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More CEOs were forced out for ethical lapses in 2018 than poor financial performance

Protesters stand outside the site of the CBS shareholder meeting in New York in December. (Seth Wenig/AP)

Chief executives faced a year of reckoning in 2018 — but not for the reasons that have traditionally led to forced departures from the corner office. As boards clamped down on misconduct in the #MeToo era and placed greater scrutiny on executive behavior, more CEOs were pushed out for ethical lapses than for poor financial performance or struggles with their board — a first for the study by Strategy&, the strategy consulting arm of PwC.

Thirty-nine percent of the 89 forced CEO departures in 2018 were due to ethical misconduct, which the study defines as the removal of a CEO following a scandal or improper conduct; examples include fraud, bribery, insider trading, environmental disasters, inflated résumés or sexual indiscretions. Meanwhile, 35 percent of ousters in 2018 were a result of poor financial performance and just 13 percent were because of conflicts at the board level or with activist investors that weren’t about financial performance but led to the CEO’s ouster.

Compare that to a decade earlier, during the financial crisis in 2008, when 52 percent of forced exits were tied to financial performance, 35 percent to board conflicts and just 10 percent to misconduct. Even in a less disastrous financial year — say 2013, as the economy was recovering but before the #MeToo movement began — nearly 40 percent of terminations were the result of performance, 30 percent the result of board struggles and less than a quarter happened because of ethical lapses.

For boards of directors, said Martha Turner, a partner with Strategy&, “there’s a new call for transparency and accountability, especially with issues regarding the #MeToo movement and other indiscretions for which there is increasingly zero tolerance,” she said. There’s more “reluctance for the board to give CEOs the benefit of the doubt.”

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The year was filled with marquee names who stepped aside amid investigations into their behavior. In September, for instance, CBS’s powerful longtime chief executive, Leslie Moonves, resigned following sexual misconduct allegations. In December, the company said Moonves would not receive his severance. (At the time, Moonves’s lawyer said in a statement that the board’s decision was “without merit” and that Moonves “vehemently denies any nonconsensual sexual relations and cooperated extensively and fully with investigators.”)

The year also saw the departures of CEOs from Lululemon, WPP, Intel and Barnes & Noble, to name a few — often amid allegations of misconduct or violations of company policies that ranged from sexual harassment to consensual relationships with employees.

The rise in ousters for ethical misconduct comes in a year when a strong economy meant strong numbers for many CEOs, and it may seem logical that the proportion of terminations from financial figures was slightly lower. But 2018′s results also follow a 12-year trend of more CEOs getting the ax for their misconduct as boards have been expected to play a greater oversight role. (PwC has examined the reasons for forced departures since 2007, but has run the analysis on overall CEO turnover since 2000.)

“Boards feel they have to hold their CEOs accountable to the code of conduct in the same way they would with employees,” said Bill George, a senior fellow at Harvard Business School and former chief executive of Medtronic who recently retired from the Goldman Sachs board. “There’s a strong feeling from boards they have to do it.”

Some of that pressure, George said, is now coming from employees, who are getting their voices heard more often by the board.

“That’s a very important factor today that didn’t exist 10 years ago,” George said. “I don’t think the conduct has changed, but the standards have changed.”

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The PwC study also found that CEO turnover in general — forced changes as well as planned successions and handoffs due to mergers and acquisitions — hit a record high in 2018, as 17.5 percent of the 2,500 largest global public companies had a change at the top. That number swelled not only as the number of forced departures grew, but as planned successions did, too.

More companies, Turner said, “are doing more and more deliberate, proactive succession planning for C-suite positions, and as a consequence, we tend to see more and more planned, healthy turnover to suitable and likely insider successors.”

One group of CEOs who do seem a bit safer from getting forced out, the study found, are long-tenured chief executives, who are often good performers to have lasted that long and may have stronger relationships with the board.

That’s what makes a case like that of Moonves, who was CEO of CBS for 15 years and had been a top executive there for several years before that, exceptional: CEOs who have served more than 20 years were about half as likely to be forced out of their jobs as those who had served less than five years, the study found.

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