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Big companies dismiss CEOs in growing numbers, but their successors fail to boost performance, studies find

August 1, 2002

For more information, contact: Benjamin Haimowitz,

"The CEO as savior is a popular myth that is not supported by reality."

Although big corporate CEOs are being dismissed in the U.S. at an unprecedented rate, their replacements usually don't do any better than they did.

That is the unsettling news to emerge from two new studies that examine the increasing phenomenon of CEO dismissal in the U.S., as well as the belief driving the trend -- namely, that lagging company performance can be rectified by changing leadership at the top.

According to the two studies -- one presented at the Aug. 11-14 annual meeting of the Academy of Management in Denver, the other appearing in the August Academy of Management Journal -- that belief is based more on hope than reality: replacements for CEOs dismissed from big corporations, the new studies find, usually don't do any better than their predecessors.

Yet, big corporate CEOs are being dismissed in the U.S. at an unprecedented rate. Margarethe Wiersema, a professor at the University of California, Irvine, in the study to be presented at the Academy meeting, reviews all CEO succession events in Fortune-500 companies in two recent years and finds that 37 percent were dismissals, "an incidence…far higher today than what it has been in the past."

By dismissals Wiersema means something that was publicly announced as such. If early retirements are added -- that term frequently being code for involuntary separation -- it would appear that a large majority of the successions nowadays in large public U.S. firms involve some element of forced departure.

Comparing CEO dismissals in 1996 and 1997 with those in earlier periods, Wiersema notes that a study of CEO turnovers from 1971 to 1985 found the dismissal rate to be 20 percent, while another study for the period 1971-1989 found it to be 13 percent. And these studies and others, she notes, used a looser definition of dismissal than in her study, not requiring the official stamp of a public announcement.

While conceding that senior executives of major companies are "indeed subject to greater discipline" than formerly, Wiersema also finds that "the replacement candidates are not successful at improving the performance of these firms." Using several measures of financial performance for the two years before and after the year of the announced CEO dismissals, she discovers that the newcomers brought little or no improvement in firms' results, whether measured by accounting indicators or stock price. In fact, in the two years post-succession, the median stock performance of dismissal firms was significantly worse than it was in the two years pre-succession.

In addition, firms that dismissed their CEOs perform no better, and by some measures significantly worse, in the post-succession years than firms that experienced routine successions.

Comments Prof. Wiersema: "The CEO as savior is a popular myth that is not supported by reality. It is all too easy for a board focused on restoring investor confidence in the firm's leadership to slip into believing that the new CEO will indeed be a savior. Yet, most boards are ill prepared to deal with this preeminent issue and too often turn it over to executive recruitment firms, which generally lack the strategic understanding of the firm needed to make a good choice.

"Then, after breathing a sigh of relief that the crisis has passed, the board is likely to find it all too tempting to step completely out of the picture and let the new CEO take command. Unfortunately, without meaningful oversight, there is no guarantee that the firm and its executive team are on the right track."

Meanwhile, a second new study, appearing in the August/September issue of the Academy of Management Journal, provides further evidence to suggest that dismissing CEOs yields little or no improvement in corporate financial results. The study, by Wei Shen of the University of Florida and Albert A.Cannella Jr. of Texas A&M, is based on data from 228 randomly selected large companies that changed chief executives between 1988 and 1994. Of the 228 companies, 41 had contender successions, in which an insider displaced a CEO who left involuntarily; 28 had outsider successions, which generally reflect dissatisfaction with the incumbent CEO; and 159 had routine successions following a CEO's retirement.

The study controls for nine factors that affect companies' financial performance, including firm size, governance structure, industry environment, and pre-succession return on assets.

Despite the strong mandate for change that generally comes with contender successions, these replacement CEOs did no better than routine successors, as gauged by return on assets in the three years following the year of turnover. Moreover, outsider successors -- that is, chief execs who were recruited from outside the company, generally to initiate strategic change -- did significantly worse than routine successors.

As Wiersema puts it, in summing up her study: "The expectation that a new CEO can generate a quick turnaround is highly unrealistic given the long-term forces at work and the historical pattern of decisions responsible for the current situation. Boards that fail to stand up to management are in large part to blame for the erosions in competitive position and shareholder value that the new CEO is supposed to correct. The only solution to prevent this crisis in leadership in the first place is for the board to become more diligent as a governing body."

Media Coverage:
Business Week. A New CEO is no Savior. (Monday, August 19, 2002).
Public Radio International. Marketplace Morning Report. Replacing a company's CEO doesn't necessarily mean the new one will do any better. (Thursday, August 01, 2002).
The Denver Post. Fame, shame, blame. (Sunday, August 04, 2002).
The Washington Post. When the Boss Gets Axed. (Sunday, August 18, 2002).

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