Model Management: trouble at the top

A new term has entered the business lexicon. "CEO churning" refers to the unseemly speed with which many chief executives now arrive and then depart from their jobs. In the boardrooms of corporate America in particular, a very expensive game of musical chairs is being played out.
October was a busy month. No fewer than 129 CEOs of US companies left their jobs, being either fired, eased out, or resigning to pursue other interests. Warren Bennis and James O'Toole, based at the University of Southern California, point out that the turnover of CEOs is accelerating.

Among recent departees is Douglas Ivester, who was shown the door at Coca-Cola while the grave of his predecessor Roberto Goizueta was still warm. Other high-profile casualties include Robert Nakasone, who arrived as CEO of Toys R Us in 1998, and left just 18 months later, and Gregory Wolf, who lasted less than two years as CEO of Humana.

These tales of boardroom woe add up to what Bennis and O'Toole call "CEO churning" - a trend, they say, that is more than just a series of headlines. A string of studies and reports supports their argument. It suggests that the modern CEO's office is fitted with a revolving door. The Business Council, a group of executive grandees, no longer puts an incoming CEO immediately on its membership list, the New York Times recently reported: it prefers to wait and see if the newcomer will last any longer than his predecessor.

A study carried out by MIT professor Rakesh Khurana found that CEOs appointed after 1985 are three times more likely to be fired than those appointed before that date. Separate research by the Center for Executive Options - a division of the Boston-based consultancy Drake Beam Morin - found that a third of Fortune 100 companies have replaced their CEOs since 1995.

Similarly, UK CEOs have a diminishing half-life. A recent study carried out by academics from Cranfield School of Management revealed that the UK's top 350 quoted companies change their CEO on average every five years. CEOs at the top 100 companies fare even worse, with 72 per cent in the role for less than five years. (Only seven CEOs in the top 100 quoted companies have survived over 10 years.)

So what's going on? In part, CEO churning - and accelerating executive turnover in general - may be due to a lower tolerance for poor performance. This would suggest that CEOs making abrupt departures is a sign that boards are doing their job more diligently. Bennis and O'Toole aren't buying that story.

"We agree that one cause of CEO churning has been executive incompetence in coping with exogenous developments," they say. "Yet, we think that the underlying culprit is the self-defeating way in which boards select leaders... In short, boards reap what they sow. They pick the wrong CEO because they pay no heed to real leadership as a selection criterion."

The problem is that most boards don't understand what defines real leadership in today's marketplace. Instead, they tend to look for people with the right technical skills and experience. Leadership, though, requires more than this. If companies want to find a leader, they must be prepared to look for one. By definition that means looking at people who pose a threat to the corporate status quo. At present, most CEO search processes do little more than pay lip-service to the idea.

For their part, CEOs say that the role is becoming increasingly difficult and challenging. They cite the usual suspects: pressure from financial institutions to meet performance expectations; increasing complexity and competitiveness of business as a result of globalization; restructuring and managing change; increasingly demanding customers; difficulties in finding good people; and technological change, particularly the use of information technology.

It may be getting tougher at the top, but the increase in CEO turnover also suggests at least one of two other factors is at work: either able executives are moving more frequently because they are being approached by headhunters with more attractive offers, or they are not good enough to hold down the job. Either way, a shortage of talent is sending salaries and remuneration packages skywards. This is the irony. As CEO churn increases, so do their financial inducements. Whichever way you look at it, it's hard to avoid the conclusion that a lot of CEOs are being rewarded - and handsomely - for failure.