It's easy to assume that a newly minted CEO will serve his or her company well. Unfortunately, turnover in a company's top ranks can actually signal more turmoil than triumph.
Board-erline irresponsible?
A Bloomberg article recently pointed out how poorly many boards of directors are serving shareholders. While the boards should manage CEOs and CEO turnover, the article noted that many don't have good succession plans in place, leaving companies to sometimes spend months focusing on CEO searches instead of running their businesses. The article cites "disorganized transitions" in recent years at many major companies, including Citigroup (NYSE: C), American International Group (NYSE: AIG), and UBS (NYSE: UBS).
Even when boards do find new top executives, they may not always make the most prudent choices. Consider the new head of embattled financial services company CIT Group (NYSE: CIT), John Thain. He infamously spent more than $1 million redecorating his Merrill Lynch office (including a $35,000 office commode and $87,000 for two chairs). Thain also paid his driver more than $200,000 for one year's work, and handed out $3.6 billion in bonuses to his fellow Merrill Lynch employees. He ultimately sold the company to Bank of America (NYSE: BAC) in a deal that's still being investigated. If you're a CIT shareholder, you might reasonably lack confidence in his abilities and priorities.
A light at the end of the tunnel
Thankfully, there's hope that this situation might improve at least a little. Many investors have been outraged about excessive CEO pay, such as the $75 million bonus Chesapeake Energy's (NYSE: CHK) CEO collected in 2008. But while boards typically rubber-stamp such excesses, they've also grown more quick to replace CEOs who aren't performing well.
Researchers Steven Kaplan and Bernadette Minton studied CEO turnover between 1992 and 2005, and found that the average tenure of CEOs at large companies has diminished. They also note: "Internal turnover is significantly related to three components of firm performance -- performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market."
Still, this progress isn't enough. That's why shareholders have been clamoring for say-on-pay policies at many companies. Warren Buffett and many others have also taken boards to task for being overly generous with CEO pay, and failing to hold CEOs sufficiently responsible for their companies' performance. Put your money in the best companies you can find -- but only when you have real faith in their boards and their leaders.
