It’s official. FTSE 100 chief executives are finding their way to the exit less often than they used to.
A survey from recruitment agency Robert Half reveals that the annual attrition rate has fallen for the first time in three years, while time in office is growing. This comes despite commentators describing leadership movement toward the end of last year as CEOs “falling like skittles”.
So has the quality of CEOs improved? The answer to their increasing longevity in post is probably more to do with the times we live in.
Research from Robert Half says that during the past year CEO turnover has dropped to one in ten, a reduction on the previous year’s 14%. Average tenure has therefore risen to five years and six months, four months longer than in 2018.
The figures also show that 70% of the new CEOs appointed came through internal promotions. This means the number of internally recruited leaders in the FTSE 100 has risen from 40% to 46%.
Whole-career service is also increasingly valued. The number of CEOs who have spent their entire working lives with a company has risen to 15%, up from just 7% in 2015.
Charlie Grubb, Robert Half’s UK managing director of executive recruitment, says the figures represent an “inflection point”.
He points to a number of explanations for the changing nature of CEO tenure. Opinion on boards is swinging in favour of hopefuls with a long track record at their companies. An improved focus on succession planning reinforces the idea that internal candidates are what the board is looking for.
Grubb says: “While workplaces are undoubtedly going through a period of substantial change and demanding new skill sets, it is encouraging that this isn’t resulting in knee-jerk changes of leadership.
“In times of changes, continuity and consistency can be vital, and it is importance for companies, stakeholders and shareholders to give CEOs the freedom to take a longer-term view of company strategy and results without fearing for their jobs.”
That echoes others recent trends where governance authorities have asked companies to think much more about long-term sustainability of their companies. The UK governance code now says explicitly: “A successful company is led by an effective and entrepreneurial board whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.” While a high rate of CEO turnover is not necessarily incompatible with “long-term’ success, it would certainly make it harder.
Investors, too, agree that boards should be focused on long-term thinking. When Larry Fink, chief executive of BlackRock, the world’s largest asset manager, wrote to CEOs at the beginning of this year he said his firm’s engagement with boards would be all about understanding “strategy for achieving long-term growth”.
That said, some see the CEO recruitment market differently. One reason CEOs may be around longer is that the recruitment process is simply more rigorous, according to Sabine Dembkowski, managing partner with executive development specialists Better Boards. “It’s far more complex to jump from a long list to a short list and be selected,” she says.
But then there is the problem of politics, in the UK and abroad. Dembkowski adds: “Because there is such risk around Brexit and other geopolitical concerns, the last thing organisations want to do is add another risk such as change the CEO.”
Intriguingly, the changing times cited by Grubb seem to have prompted the opposite reaction elsewhere. A US recruiter, Challenger, Gary & Christmas, reported CEO turnover there was up 22% in the first quarter of 2019 compared with the first three months of the previous year.
With concerns that the US might hit the economic doldrums there was some speculation that the CEO merry go-round was a response to prepare for hard times. Changing consumer behaviour and new tech disrupting old industries were also cited as reasons for bringing in new leaders.
Strategy&, a consultancy, reported that for 2018 as a whole, US CEO turnover reached a record high of 17.5%. However, their report found that more CEOs than ever had been dismissed for ethical lapses reflecting more aggressive intervention from regulators and growing public pressure for accountability prompted by the #MeToo movement. This has produced a growing sensitivity in boardrooms toward misconduct. The increased presence of activist investors could also be a factor.
Elsewhere, academic research has suggested that CEO turnover is related to the time left on a contract: turnover rises the closer CEOs are to the end of contracts, especially if there are sensitive about performance.
Robert Half’s figures identify an interesting development, though it is difficult to know whether this is blip or part of a trend. Either way, boards would do well to keep a close watch.