Although the rate of CEO turnover in Australia declined in the past year, local CEOs are more likely to leave their jobs because of poor performance than their global counterparts, according to a study by international management consulting firm Booz Allen Hamilton and the Business Council of Australia.
The study found that overall CEO turnover in Australia – for reasons of performance, merger activity or normal transition – is still significantly higher than the global average in 2003. In 2003, 14.2% of Australian ASX 200 companies recorded a turnover event, compared to 9.5% for the global average.
It found average CEO tenure in Australia remains lower than the global average, while the trend for Boards to appoint replacement CEOs from outside the company is accelerating. ‘Outsiders’ last year made up 57% of new CEO appointments in Australia compared to 40% in 2002.
Booz Allen Hamilton conducted the Australian study – which examined Australia’s top 200 ASX-listed companies – jointly with the Business Council of Australia (BCA), as part of the annual global Booz Allen Hamilton CEO turnover study.
Commenting on the Australian findings at their official release in Sydney today, Booz Allen Hamilton Director, Marion Skulley, said: “This year’s study shows Australian companies bucking international trends in several important respects, and there are a number of salient points Boards should take away from it.”
“While the overall CEO turnover rate in Australia declined, the number of CEOs departing is still relatively high compared to the global average and this has been consistently so over the last six years,” Ms Skulley said.
“Also, the trend toward outsider CEO appointments in Australia is continuing, contrary to the international experience. These outsiders performed better on average than insider CEOs, again in contrast to the situation overseas, potentially reflecting both the smaller talent pool in Australia and the lower priority given to succession planning,” she said.
“Clearly, proven CEOs are in short supply and high demand. In our experience working with the CEOs and Boards of major Australian corporations, one of the critical issues on the table is succession planning and how to groom the next generation of leaders from within.”
BCA President, Mr Hugh Morgan, said the research underlined the need for Boards and companies to focus on strategies to overcome structural barriers in Australia that otherwise limited CEO tenure.
"These barriers include a smaller domestic economy offering fewer growth opportunities other than M&As, proximity to riskier Asian markets and a higher proportion of service-oriented industries undergoing rapid structural reform,” he said.
Among key findings of the study:
- 14.2% of Australian companies replaced their CEOs in 2003, compared to 16.8% the previous year. Globally, overall CEO turnover was 9.5% in 2003 and 10.7% in 2002.
- Average tenure of Australian CEOs increased in 2003 to 5.6 years, up from 4.4 years in 2002 but still significantly below the 2003 global average of 7.6 years.
- In Australia, outsider CEOs outperformed insider CEOs, as measured by shareholder returns delivered over their full tenure (16.4% returns for outsiders versus 10.0% for insiders).
- Utilities were the ‘safest’ sector for Australian CEOs, with no performance-related departures in 2003; other safe sectors were financial services (24% of departures performance-related), materials (25%) and energy (29%). Health care was the riskiest sector for CEOs, with half of all departures related to performance.
Mr Morgan said shorter tenure and heightened expectations of performance, relative to other markets, remained a concern for the BCA and its Member CEOs
“This is particularly so, given the overall strong performance by Australia's corporate sector and the prospect that Australia is running down its executive management resources faster than is desirable.” Mr Morgan said.
Boards, senior management, fund managers, media and regulators need to understand the context and drivers of CEO tenure as it appears to be a phenomenon in which all market participants play a role.
Booz Allen Hamilton and the BCA included in-depth interviews with 10 leading Australian CEOs for the first time as part of the CEO study, and findings from the study were generally backed up in these interviews.
About Booz Allen Hamilton
Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for 90 years. Booz Allen combines strategy with technology and insight with action, working with clients to deliver results today that endure tomorrow. With 14,000 employees on six continents, the firm generates annual sales of US$2.2 billion. Booz Allen provides services in strategy, organisation, operations, systems, and technology to the world's leading corporations, government and other public agencies, emerging growth companies, and institutions. To learn more about the firm, visit the Booz Allen website at www.boozallen.com. To learn more about the best ideas in business, visit www.strategy-business.com, the website for strategy+business, a quarterly journal sponsored by Booz Allen Hamilton.
About the Business Council of Australia
The BCA is an association of Chief Executives of leading Australian corporations. The Council was established in 1983 to provide a forum for Australia’s business leadership to contribute directly to public policy debates in order to build a better and more prosperous Australian society. The Council’s aspiration is to make Australia the best place in the world to live, to learn, to work, and to do business.