More CEOs ousted for ethical lapses, finds PwC's Strategy& study

20 May 2019 4 min. read

A study from management consulting firm Strategy& revealed that 2018 saw the greatest proportion of CEOs ousted for ethical lapses in the past 19 years, as opposed to poor financial performance or board jockeying.

The 2018 CEO Success study, which analyzed chief executive succession at the world’s 2,500 largest public companies, saw general CEO turnover reach a record high 17.5% in 2018, up 2.9% from 2017. By comparison, the year with the lowest turnover since the study began in 2000 was in 2003, with 9.8%.

Turnover rose in every region except for China, with Western Europe seeing a big jump from 14.5% in 2017 to 19.8% in 2018. North America had the lowest turnover numbers, increasing from 13.2% in 2017 to 14.7% in 2018.

By industry, the highest turnover rate was in communication services companies (24.5%), while healthcare had the lowest turnover at 11.6%.

Globally, planned CEO turnover increased from 9.9% in 2017 to 12.0% in 2018 – the highest level since research began. The growth reflects a growing trend among boards to engage in more deliberate and proactive C-suite succession planning. Examples of CEOs that departed in a planned, orderly fashion were Lloyd Blankfein, who led Goldman Sachs for 12 years, Ian Read, who lead Pfizer for eight years, and Indra Nooyi, who transitioned from the role of CEO to Chairman at Pepsico.

Turnover rate, US and CanadaForced turnovers – for reasons of poor financial performance, board struggles, and ethical lapses – jumped 0.8% to 3.6%, globally. In North America, forced departures jumped 0.9% to reach 2.9% in 2018.

For the first time in the study’s history, ethical lapses outranked financial performance and board struggles as the top reason for a forced CEO departure, rising 13 points to 39% in 2018. Strategy&'s study defines dismissal due to ethical lapses as arising from a scandal or improper conduct by the CEO or employees, such as fraud, bribery, and sexual indiscretions.

Poor financial performance led to 35% of forced departures, while board struggles led to 13%.

2018 saw Matthias Muller step down as Volkswagen CEO in the aftermath of $15 billion in fines and compensation from an emissions-dodging affair that hobbled the German automaker.

Amid the #MeToo movement, a number of CEOs have been forced to step down for behavioral misconduct. CBS’ longtime CEO Les Moonves resigned following sexual assault allegations (which Moonves denies), while WPP’s chief Martin Sorrell was ousted after allegations of personal misconduct and misuse of company assets. Sorrel has been accused of routinely verbally abusing underlings and paying for a brothel visit with company funds (Sorrell likewise denies the allegations).

The CEOs of Lululemon and Intel were fired in part for consensual relationships with employees, while Barnes & Noble CEO Demos Parneros was ousted for alleged sexual harassment of an employee.

If they’re here for a long time, it’s a good time

The report also found that long-serving CEOs (10+ years) have better performance and are less likely to be forced out. Since 2000, 19% of CEOs have stayed in their position for 10 or more years, while the median tenure, overall, has been five years.

North America CEOs are most likely to become a long-term CEO, at 30%, while BRI country (Brazil, Russia, India) and China CEOS are the least likely to crack 10 years, at 9% and 7%, respectively.

The successors of long-term CEOs tend to fall short in terms of financial performance and tenure. The report found that almost half of successor CEOs were a performance quartile lower than the predecessors, while 69% of successors of a top performance quartile, long-term CEO ranked in the bottom two performance quartiles. Long-term CEOs are a truly tough act to follow.

“Succeeding long-serving CEOs is clearly very challenging,” Per-Ola Karlsson, partner and leader of Strategy&’s organization, change and leadership practice in the Middle East, said. “Their successors typically both deliver lower returns to shareholders and are noticeably more likely to be dismissed than the legend they succeeded as well as their peers.”

The proportion of incoming women CEOs, meanwhile, fell 1.1% to 4.9% in 2018. The trend has, however, been positive since a low point of 1% in 2008. And, unlike in 2017, where the record 6% influx was driven by a 9.3% spike in North America, the largest percentages of female incoming CEOs were in the BRIC and other emerging countries.