New data from executive compensation research firm Equilar suggests that boards are stepping up their scrutiny, which could have a negative impact on CEO tenure.
According to data cited in the Reuters article, CEOs of U.S. retail and packaged goods companies tend to stay in office for seven months less than their auto, finance and manufacturing counterparts, but the trend of shorter CEO tenures may be spreading to other industries.
The Reuters article quoted Jim Rothman, global head of shareholder advisory at Barclays, as giving his thoughts on why boards are more likely to take a stance against the CEO at this point.
“There's a new lack of patience at the board level,” Rothman was quoted as saying. “With the COVID-19 pandemic under control and economic indicators improving, there's plenty of room to judge CEOs' ability to run their businesses. If they're not delivering, they're going to be fired.”
A Reuters article noted that recent CEO changes at Starbucks and Nestle suggest that chief executives at retail and consumer goods companies may have less time to turn around struggling performance. But now that inflation is starting to ease and the economy appears to be stabilizing, stakeholders, especially activist investors, are hoping for better stock performance.
What are the lessons to be learned from this new discovery?
CEOs are more likely to be subject to removal by the board and Activists. Activist shareholder campaigns have increased this year. According to Barclays, shareholder activists launched a record 147 campaigns in the first half of the year to get the attention of boards of directors. Many of these campaigns are calling for the removal of CEOs. As in the cases of Nestle and Starbucks, perhaps these activist campaigns are convincing boards to remove CEOs before the activists ask them to. Increased scrutiny could lead to more CEO removals.
The relationship between the board and the CEO may change. Boards may see an increase in activist campaigns and become more engaged with management, expecting the CEO to act more quickly to improve performance. This could lead to a deterioration of a good relationship and lead to board and management turnover. On the other hand, increased engagement could lead to greater cooperation and alignment between the CEO and the board, leading to better outcomes for the company.
Succession planning for the CEO and board of directors becomes even more important. Poor performance exposes board members to the risk of being denounced by activist investors and challenged in the next board election. The risk of being ousted by activists means that more boards may consider ousting the CEO before being ousted by activist investors. As part of their response to activists, boards need to be serious about finding qualified director candidates to strengthen the company's ability to manage growth into the future, as well as a future CEO candidate who can take the company to the next level. Communicating such preconceived ideas to shareholders may reduce the likelihood that activists will attempt to oust directors and CEOs.
