U.S. Companies Are Dismissing CEOs Faster Due to Weak Stock Performance
A recently published report indicates that U.S. companies are holding their CEOs more accountable by terminating them more swiftly in response to poor stock performance. The "CEO Turnover Practices in the Russell 3000 and S&P 500: 2024 Edition" report released by the Conference Board today emphasizes a significant shift in how companies react to low stock prices.
According to the report, this year, 42% of S&P 500 companies and 45% of Russell 3000 companies that changed their CEOs were in the bottom 25% of stock returns in their sectors. This is an increase from 2017, when only 30% of S&P 500 companies and 29% of Russell 3000 companies that changed CEOs were in the same situation.
Blair Jones, co-author of the report and managing director at Semler Brossy, stated, "We see that company boards are clearly less patient with underperformers." The report suggests that the increasing urgency in CEO changes is partly due to the post-pandemic environment, where supply chain issues and geopolitical tensions are no longer accepted as valid reasons for low financial returns.
Investor scrutiny has also intensified, with corporate activists frequently calling for leadership changes as a remedy for poor stock performance. This situation is prompting boards to proactively change CEOs to fend off pressure from activists.
Recent CEO changes in companies such as Starbucks (NASDAQ:SBUX) and Bloomin' Brands (NASDAQ:BLMN) exemplify this trend, while the case of Southwest Airlines (NYSE:LUV) retaining CEO Bob Jordan and the pressure for a clear succession plan at Air Products and Chemicals (NYSE:APD) illustrates activist involvement.
Despite the quicker occurrence of CEO changes, the succession process remains traditional. Boards tend to favor internal candidates familiar with the company culture who can ensure a smooth transition. This year, 77% of new S&P 500 CEOs and 59% of new Russell 3000 CEOs were promoted from within. These internal promotions typically come from roles such as chief operating officer, president, or chief financial officer.
The report also notes a historic increase in female CEOs, rising to 9.5% in the S&P 500 and 7.6% in the Russell 3000. However, most of these appointments are occurring in smaller companies with revenues under $5 billion, primarily within the healthcare, discretionary consumer, and materials sectors.
Jason Schloetzer, co-author of the report and a professor at Georgetown University, noted that the typical profile of a CEO successor has remained consistent with past trends, favoring white males in their early 50s with previous COO experience.