New Data Suggests Board ‘Lack of Patience’ May Mean More CEO Ousters

Recent data from executive compensation research firm Equilar suggests boards may be intensifying their oversight, which may have an adverse impact on CEO tenure.

Although the data cited in an article from Reuters shows that CEO tenure at U.S. retail and packaged goods companies has been seven months shorter than tenure at auto, finance and manufacturing companies, shorter CEO terms may be a trend that spreads to other industries.

The Reuters article cites Jim Rossman, global head of shareholder advisory at Barclays, giving his perspective on why boards are more likely to move against CEOs at this time.

“There is a fresh lack of patience at the board level,” Rossman is quoted as saying. “With the COVID-19 pandemic behind us and some stronger economic data, there is plenty to judge a CEO’s management abilities by, and if they aren’t performing, they are out.”

The Reuters article states that recent CEO changes at Starbucks and Nestle suggest that chief executives at retail and consumer companies may have a shorter timeline to jumpstart sluggish performance. However, now that inflation has begun to moderate, and the economy appears to have stabilized stakeholders are expecting better stock price performance—especially activist investors.

What are the takeaways from this new finding?

CEOs are likely to be targeted for removal by boards and activists. Campaigns by activist investors have been on the rise this year. According to Barclays, shareholder activists launched a record 147 campaigns in the first half of this year, forcing boards to take notice. Many of these campaigns have asked for the CEO to be removed. As in the cases of Nestle and Starbucks, perhaps these activist campaigns are persuading boards to remove the CEO before activists even ask them. Greater oversight may mean more CEO ousters.

The relationship between the board and the CEO may change. As boards see the number of activist campaigns increase, they may look to engage management more, hoping to get CEOs to move faster to improve performance. What might have been a good relationship could turn sour and lead to changes on the board or the management team. On the other hand, the increased engagement could strengthen cooperation and collaboration between the CEO and the board, which could lead to better outcomes for the company.

Succession planning for the CEO and board will become even more vitally important. If performance lags, the board members risk activist investors blaming them and then running candidates against them in the next board elections. The risk of being ousted by activists may mean more boards may consider getting rid of the CEO before activist investors get rid of them. As part of dealing with the activists, the board will need to be serious about finding qualified director candidates to strengthen its ability to manage company growth into the future as well as finding future CEO candidates that can take the company to the next level. Communicating this type of forethought to shareholders can potentially lessen the possibility of activists trying to oust board members or the CEO.