In its annual report, released Tuesday, the Conference Board found that among Standard & Poor's 500-stock index companies that were in the bottom group of performers -- as ranked by their total shareholder return -- the CEO succession rate jumped five percentage points, from 12.2 percent in 2015 to 17.1 percent in 2016. That's well above the 13.9 percent average over the past 16 years, said Matteo Tonello, the Conference Board's managing director of corporate leadership, and the highest rate since 2002, when 21.2 percent of S&P 500 companies made a change at the top.
“If you fall into the bottom quartile you had a 60 percent higher probability of seeing your CEO replaced than the better performing companies in 2016,” he said. While he said it was too early to point to a definitive reason for lower performers being shown the door, a perfect storm of more pressure from activist investors, more scrutiny on the link between CEO pay and performance and more dismissals in certain hard-hit sectors prompted the relatively high boost from years past.
“We really think there’s been a shift in corporate culture in the last few years,” he said. “There’s much more scrutiny and accountability when it comes to performance, especially among S&P 500 companies where CEOs are very well paid.”
Jason Schloetzer, a professor at Georgetown University and a co-author of the report, said he thinks the uptick in changes is “reflective of the shorter leash and the decrease in patience that boards and shareholders in general have for waiting out periods of poor performance.”
The report found that trend to be particularly true in such sectors as retail, oil and gas and consumer products, where CEOs were either hit by broader economic trends or industry upheaval that made for tougher competition. In those sectors, boards are quicker to take action than they've been in the past, Tonello said.
Half of the CEO jobs that changed hands in the wholesale and retail industry in 2016, for instance, were outright dismissals, rather than mere retirements, compared with 14 percent in 2015. “Combine the shift to online [shopping] with rising real estate and leasing costs and weak demand from foreign markets,” he said. “And if you add to that the increasing pressure of activists who see it as an opportunity to jump in and change the strategic direction, that’s really a very powerful combined force that drives this change.”
Boards are also more candid about why they're switching out the skipper. Euphemistic explanations such as “retiring” or “leaving to spend time with their family” are being replaced by more candid — if still corporate and unspecific — assessments. In 2013, the report found, boards said that 67 percent of successions were because of a retirement, a number that has dropped each year since. In 2016, just 38 percent of changes at the top were assigned that rationale, while 60 percent were described as a resignation or stepping down.
That hardly means companies explicitly say they axed the CEO in the news release, however. For instance, when Priceline CEO Darren Huston departed the online travel site last year following an investigation into a personal relationship he'd had with an employee, the news release didn't specifically say he was forced out. But it also didn't say he was retiring, and it made it pretty clear he'd gotten pushed. Huston, the company said, “resigned following an investigation,” which determined that he'd “acted contrary to the Company's Code of Conduct and had engaged in activities inconsistent with the Board's expectations" for his behavior.
Schloetzer said he has been observing the trend toward more color and transparency from boards on CEO departures, even if they are still relatively opaque. “It's kind of like a cruise liner in the ocean,” he said. “You get a little bit every year, but when you look back long enough, I think you see a meaningful trend.”
He says that increased media attention on CEO changes, particularly when the company is one well-known by consumers, may have “made it more important for boards to control the story from the beginning, by being more transparent in their press releases from the start.”
The Conference Board's report examined several other trends in CEO succession, including how often companies name interim chief executives (about 10 percent take this more gradual approach) and how often boards turn to inside vs. outside candidates (nearly 86 percent of replacements come from the inside, about the same as in 2015). It also looked at how many women get the top job when a succession takes place: Six of the 63 changes at the top involved a new female CEO.
While that number may be “depressing,” Tonello said, the number is still much better than the number of women who were named to the job in 2015. “Last year, there was only one.”