In the wake of the financial crisis that brought some of Wall Street's biggest firms to their knees and sparked a wave of sweeping regulatory changes, a new report from The Conference Board shows that companies are no longer hesitant to dismiss CEOs for cause.
The Conference Board's 2011 CEO Succession Report took a close look at succession events regarding CEOs at S&P 500 firms over the past decade and found that from 2006 through 2009 -- the peak years of the financial crisis -- found that nearly 80% of all succession events were associated with CEO dismissals.
That spike in dismissals -- most of which were the result of disciplinary actions -- meant that fewer CEOs at S&P 500 companies were leaving as part of the normal retirement cycle. The report found that between 2000 and 2010 declined in lockstep with the increase in those dismissed for cause, peaking at 34% in 2004 and following to a low of 16% in 2008.
For investors who were burned by corporate malfeasance, this trend shows there's been something of a renaissance in corporate governance and succession planning at some of the nation's largest companies and should restore some degree of confidence in the U.S. equities market.
"One of the most important strategic risks that a corporation must manage is the succession of its chief executive officer," said Jason Schloetzer, assistant professor at the McDonough School of Business at Georgetown University and co-author of the report. "This is true today, more than ever, due to the recent challenges posed by a variety of economic factors. To make an informed decision, the board should understand not only the technical knowledge and experience necessary to effectively lead the company into the future, but also the context and practices of the succession planning process."
In May, a report from the American Federation of State, County and Municipal Employees (AFSCME) found that some of the largest mutual funds -- including Vanguard and BlackRock -- were guilty of rubber-stamping company-initiated, executive-compensation plans that often compromised shareholders' best interests.
AFSCME, the country's largest public service union with more than 1.6 million members and a contributor of more than $1 trillion in retirement assets that are invested by public pension systems, examined the voting patterns of 26 of the largest mutual fund families during corporate annual meetings during a one-year period beginning in July 2009.
The Conference Board, and independent business membership and research association, said that 51 CEOs in the S&P 500 left their post, a succession rate of 10% that's more or less consistent with the succession rate for the entire decade.
However, the probability of CEO succession, the report found, was much higher following periods of disappointing performance with CEO departures ranging from 21% in 2002 to 10% in 2009 for companies that delivered disappointing sales, earnings or stock performance compared to a range of between 7% and 12% for better-performing S&P members.
Perhaps just as important as boards of directors' willingness to jettison wayward or inept CEOs is their newfound interest in looking outside the company for new blood.
In 2009 and 2010, 25% of successions involved hiring someone from another company or industry, "consistent with the upward trend in the hiring of outsiders that has been recorded in the last two decades," the report said.