Over and Over

Conventional wisdom is that new CEOs need to boost earnings per share in two years or they’re out. However recent findings from Booz & Company’s latest CEO Turnover report seem to suggest otherwise. Dismissals are happening, but they’re more often caused by board infighting rather than poor CEO performance. Using ten years of data they had collected, researchers Per-Ola Karlsson, Gary L. Neilson, and Juan Carlos Webster found:

For all CEOs, the likelihood of being dismissed for poor performance in a given year is only 2.1 percent. Given this data, it is not surprising that the correlation between stock performance and dismissal is generally not significant. Indeed, the very worst-performing chief executives – those in the bottom decile, whose companies’ two-year stock price had fallen by 25 percent in absolute terms and whose companies had under­performed their regional industry peers by 45 percent – had only a 5.7 percent probability of termination.

These findings are not a huge surprise to me. CEOs need time to adjust to their new role and develop the vision it was the chairman’s job to steward. Perhaps boards are becoming more willing to give the CEO more time, or, as Karlsson, Neilson and Webster hypothesize, there isn’t a large enough pool of candidates to take over the top spot.