Study shows China and Japan have the lowest rates of long-serving CEOs

17 June 2019 Consultancy.asia

Chief executive turnover at the world’s largest companies reached a record high last year – with CEOs in China and Japan having the shortest tenures.

Last year was the most turbulent in two decades at the very top of the world’s 2,500 largest publicly-listed companies according to a recent study by PwC’s global strategy consulting arm Strategy&, with a record 17.5 percent turnover rate of CEOs registered in 2018. China was the only region worldwide with lower turnover figures on the previous year, although China and Japan were revealed to have the lowest rates of long-serving chiefs.

Of especial note last year though was not just the high churn rate but the manner of dismissals, with a 50 percent spike in the number of CEOs ousted due to ethical lapses – on the back of an already sharp climb over the previous five years. Indeed, while the percentage of forced turnovers remained steady at around 20 percent, more leaders were bumped for ethical lapses than for financial performance or board struggles for the first time in the study’s history.

According to Strategy&, the rise in these types of dismissals (defined by the consultancy as the result of a scandal or improper conduct by the CEO or other employees, with examples including fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions) reflects several societal and governance trends, such as heightened public scrutiny in the digital era and greater accountability around sexual harassment.

Tide still rising

Altogether, the average median tenure of chief executives has dropped from eight or so years when Strategy& first undertook its CEO study in 2000 to just five years today. Still, according to firm’s data, close to one fifth of CEOs globally manage to survive in the role for a decade or more. The figures however are heavily skewed by US trends – where 30 percent of CEOs remain for the long haul – with Japan and China revealed as having rates of just 9 and 7 percent.

Rather than being down to a greater number of scandals or poor company performance though, the authors note that several other factors may explain the regional differences. In Japan, for example, societal norms encourage earlier retirements than in most other countries, and so CEOs typically assume office later in their career and serve for only a few years, after which they move on to become the board chair as a younger executive succeeds them.

And although the BRIC countries (Brazil, Russia, India and China) recorded an ethically-related overall CEO turnover rate pushing 9 percent between 2011 and 2016, the low long-term tenure figures in China “where the corporate governance model is of a more recent vintage are” are again another matter. Here, the government sometimes shuffles CEOs within or between industries, and there’s a higher rate of regulatory and business flux than in mature economies.

Declining performance

Perhaps one saving grace for ambitious leaders in East Asia facing statistically shorter periods at the top, Strategy&’s study also examined the tough task ahead for successors to long-serving CEOs, with close to half of the previous replacements analysed overseeing a drop the company’s TSR (total shareholder returns) drop by one quartile or more. And the longer the long-serving CEO’s tenure, the worse the successor performed.

“Succeeding long-serving CEOs is clearly very challenging,” concludes Per-Ola Karlsson, Strategy& partner and leader of the firm's Organisation, Change and Leadership Practice in the Middle East. “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.”

As for the incoming CEOs – which more broadly in the consulting sector have this year included Carmine Di Sibio at Ernst & Young, Cognizant's Brian Humphries and Martine Ferland at Mercer – around one quarter have had prior public company CEO experience, a third have international experience, the same number holds an MBA, 17 percent were company outsiders, 15 percent are foreign nationals, and less than 5 percent were women - including none in the information technology domain.