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The Honolulu Advertiser
Posted on: Friday, May 19, 2006

CEOs losing their jobs at highest rate in 10 years

By Brooke A. Masters
Washington Post

WASHINGTON 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 yesterday.

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 Stonecipher, forced out at Boeing Co. after a scandal; Hewlett-Packard Co.'s Carly Fiorina; Walt Disney Co.'s Michael Eisner, and Morgan Stanley's Philip 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 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, " Oyer said.

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 Helfat, a strategy professor at Dartmouth's Tuck School of Business who studies chief-executive turnover.