Number of CEOs Fired for Ethical Reasons on the Rise: Report

Published May 28th, 2017 - 05:55 GMT
Key results showed that forced CEO turnovers on a global level due to ethical reasons rose from 3.9 percent (in 2007–2011) to 5.3 percent (in 2012–2016). (Pixabay)
Key results showed that forced CEO turnovers on a global level due to ethical reasons rose from 3.9 percent (in 2007–2011) to 5.3 percent (in 2012–2016). (Pixabay)

The share of CEOs forced out of office for ethical reasons has been on the rise, according to the 2016 CEO Success study released by Strategy&, formerly Booz & Company and part of the PwC network. The study analyzed CEO successions at the world’s largest 2,500 public companies over the past 10 years.

Key results showed that forced CEO turnovers on a global level due to ethical reasons rose from 3.9 percent (of all successions in 2007–2011) to 5.3 percent (in 2012–2016) — a 36 percent increase in ten years. In large part, this can be attributed to increased public scrutiny and accountability of executives.

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The increase was more dramatic at companies in the US and Canada. Forced turnovers for ethical reasons at these companies increased from 1.6 percent of all successions in 2007–11 to 3.3 percent in 2012–16 — a substantial 102 percent increase. In Western Europe, the share of CEOs forced out for ethical reasons increased to 5.9 percent from 4.2 percent, and in the BRIC countries, to 8.8 percent from 3.6 percent.

Specifically in the Middle East, CEO succession rates follow the global norms. Overall, 15.7% of CEOs transitioned in 2016, near the global average of 14.9 %. The trend toward planned (vs. forced) transitions continues: this year’s 8 successions were all planned. And also the Middle East has had its share of dismissals due to ethical reasons at rates very close to the global averages. All this suggests that Board governance best practices are being increasingly implemented throughout the region.

“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,” said Per-Ola Karlsson, partner and leader of Strategy&’s organization and leadership practice in the 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 issues than in the past.”

Five trends shaping CEO accountability:

1. 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 misbehavior.

2. Governance and regulation: The rise of public criticism of executives and corporations has translated directly into regulatory and legislative action, and companies all over the world have moved to a zero-tolerance approach toward bad behavior in the C-suite.

3. 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.

4. 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.

5. 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 the lightning-fast flow of Web-based financial news and data ensures that negative information travels quickly and widely.

The study also found that at the largest companies (those in the top quartile by market capitalization) 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.

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“The fact that forced turnovers for ethical lapses were even higher at companies in the top quartile by market capitalization in these regions supports our hypothesis, since the largest companies are the most affected by the five trends and are subject to the greatest scrutiny,” said Nick Robinson, partner and Middle East Forensic Services Leader with PwC.

“The increasing incidence of CEOs being forced out of office for ethical lapses may have a positive effect on public opinion over time by demonstrating that bad behavior is in fact being detected and punished,” said Per-Ola Karlsson. “In the meantime, CEOs need to lead by example on a personal and organizational level and strive to build and maintain a true culture of integrity.”

The 2016 CEO Success study further revealed that...

CEO turnover at the world’s largest 2,500 companies decreased from its record high of 16.6 percent in 2015 to 14.9 percent in 2016, due largely to the drop in merger and acquisition activity. CEO turnover was highest in Brazil, Russia, and India, at 17.2 percent, followed by Japan (15.5 percent) and Western Europe (15.3 percent) and China (15.2 percent). CEO turnover fell in every region we studied except for the US and Canada.

There were 12 women globally appointed to the role of CEOs in 2016 — 3.6 percent 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 percent. The share of incoming female CEOs was highest in the US and Canada, rebounding to 5.7 percent 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.

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