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More CEOS forced out of office for ethical lapses

The share of CEOs forced out of office for ethical lapses has been on the rise, according to the 2016 CEO Success study by Strategy&, PwC’s strategy consulting business. The study, which analysed CEO successions at the world’s largest 2,500 public companies over the past 10 years, reports that forced turnovers due to ethical lapses rose from 3.9% of all successions in 2007–2011, to 5.3% in 2012–2016 – the 36% increase due in large part to increased public scrutiny and accountability of executives.

The increase was more dramatic at companies in the US and Canada, where forced turnovers for ethical lapses increased from 1.6% of all successions in 2007–2011 to 3.3% in 2012–2016, or a 102% jump. In Western Europe, the share of CEOs forced out for ethical lapses increased to 5.9% from 4.2%, and in the BRIC countries, to 8.8% from 3.6%.

“Our data cannot show – and perhaps no data could – whether there’s more wrongdoing at large corporations today than in the past. However, we doubt that’s the case, based on our own experience working with hundreds of companies over many years,” says Per-Ola Karlsson, partner and leader of Strategy&’s organisation and leadership practice for PwC Middle East. “Over the last 15 years, five trends have resulted in boards of directors, investors, governments, customers, and the media holding CEOs to a far higher level of accountability for ethical lapses than in the past.”

Five trends shaping CEO accountability

According to the study, the five trends shaping CEO accountability are:

  • Public opinion Since the financial crisis of 2007–08 and the Great Recession that it ignited, confidence and trust in large corporations and CEOs has been declining; the public has become more suspicious, more critical, and less forgiving of corporate misbehaviour;
  • Governance and regulation The rise of public criticism of executives and corporations has translated directly into regulatory and legislative action, and companies in the US and many other countries have moved to a zero-tolerance approach toward bad behaviour in the C-suite;
  • Business operating environment Companies increasingly are (1) pursuing growth in emerging markets where ethical risks, such as the possibility of bribery and corruption, are heightened, and (2) relying on extended global supply chains that increase counterparty risks;
  • Digital communications The use of email, text messaging, and social media has created new risks for ethical lapses. A company’s digital communications can provide irrefutable evidence of misconduct, and their existence increases the likelihood that a CEO will be held accountable, and
  • The 24/7 news cycle Unlike in the mid- to late-20th century, when most executives and companies could maintain a low public profile, today’s lightning-fast flow of web-based financial news and data ensures that negative information travels quickly and widely.

Despite the global increase in forced turnovers for ethical lapses, companies in the US and Canada have the lowest incidence of such dismissals – 3.3% in 2012–2016 compared to 5.9% in Western Europe and 8.8% in the BRIC countries. More stringent governance regulation is one likely reason. Both the legislative requirements for codes of conduct and anti-bribery statutes have been tightened significantly in the US.

The study found that at the largest companies (those in the top quartile by market capitalisation) in the US and Canada and Western Europe, the overall share of CEOs forced out of office was significantly greater than the share forced out in the other market-cap quartiles. This is likely because the largest companies are most affected by the five trends and are subject to the greatest scrutiny.

Other highlights

  • CEO turnover CEO turnover at the world’s largest 2,500 companies decreased from its record high of 16.6% in 2015 to 14.9% in 2016, due largely to the drop in merger and acquisition activity. CEO turnover was highest in Brazil, Russia, and India, at 17.2%, followed by Japan (15.5%), Western Europe (15.3%) and China (15.2%). CEO turnover fell in every region we studied except for the US and Canada.
  • Women CEOs There were 12 women globally appointed to the role of CEOs in 2016 – 3.6% of the incoming class. This marks a return of the slow trend toward greater diversity that had been in place over the last several years, and a recovery from the previous year’s low point of 2.8%. The share of incoming female CEOs was highest in the US and Canada, rebounding to 5.7% after falling for the previous three years. Five industries – healthcare, industrials, information technology, consumer staples, and telecom services – did not have a single incoming female CEO in 2016.

This article was originally published by the Institute of Singapore Chartered Accountants in the June 2017 edition of ISCA Journal. You can read the article and see the full edition here.