Hard Times in the Executive Suite: US Experience Shows That Changing the Chief Executive Is Not Necessarily a Panacea for Improved Company Performance. Europeans Should Take Note
Wiersema, Margarethe, European Business Forum
Lacklustre financial performance followed by dismissal of the CEO.
It's a familiar story these days with WorldCom, Ford, Gillette, and Coca-Cola just a few of those which bear witness to the experience. No corporate leader is immune when shareholder value suffers and boards of US publicly-traded companies seem increasingly willing to discipline those who fail to live up to the market's initial expectations.
CEO dismissals were not always so common. Based on a recent study of CEO successions in large US companies (see 'Details of the study' box on p44), I found that the practice of dismissing the CEO has increased dramatically. In the 1970s and early 1980s long tenures were common and dismissal a rare event. Today, however, fully one-third of all CEO succession events within large, public companies are due to dismissal. Another third consists of CEO departures that are announced as 'early retirements', a code for involuntary departure on the part of the CEO. Thus, the majority (71 per cent) of all CEO successions within US large public companies are, in all probability, not voluntary.
If recent events are any gauge the departure of Ron Sommer at Deutsche Telekom, Jean-Marie Messier at Vivendi, Thomas Middelhoff at Bertelsmann, and Manfred Zobl and Roland Chlapowski at Swiss Life--it would appear that European companies are also experiencing a wave of executive housecleaning.
Transatlantic differences in governance
Notwithstanding this spate of high profile dismissals, involuntary CEO resignations are still less common in Europe than in the US. Differences in corporate governance between Europe and the US largely account for the gap. The increase in the phenomenon within US companies has been acknowledged to be in direct response to Wall Street and institutional investor pressures for firm performance. Starting in the mid-1980s, US CEOs were increasingly subject to the monitoring and disciplinary effects of the takeover market, shareholder activism, and institutional investors. These capital market pressures, in turn, spawned the growth of boards where outsiders were in the majority and executive compensation tied to stock price in the 1990s.
In Europe, by contrast, the corporate governance system and company ownership patterns have served to protect management from market pressures. Traditional interdependent relationships and cross-holdings or preference share systems that control voting rights have shielded companies from unwanted suitors and meddlesome investors. Ownership is significantly less widely dispersed, with more firms having owners with significant voting rights, within European companies than in the US. While the UK and Ireland have the highest level of widely held ownership (63 per cent and 62 per cent respectively), overall only 37 per cent of European companies are widely held (Faccio and Lang, 2002). In Germany, Italy, and Austria, a small portion of company shares--10.4 per cent, 11.1 per cent, and 13 per cent respectively--are held widely. On average, 44 per cent of European companies are family controlled and in France, Germany, Italy, and Portugal the rates are significantly higher. In some countries (Austria, Finland, Germany, Norway, and Italy, for example) the State controls a significant proportion of publicly-traded companies. These ownership patterns, and the close links forged between top management and 'block' or family owners, serve to insulate the company and its managers from capital market pressures for shareholder performance.
In addition, European companies provide far less transparency and communication to investors. Quarterly reporting of earnings results are not common and there is almost no information provided on executive pay. Missed earnings targets do not generally spur investors into actively communicating their displeasure with management. Not surprisingly, then, poor company performance does not necessarily lead to pressures for accountability and the disciplining of the CEO by the board. …