Booz & Company last week issued its annual study of CEO succession in the world’s top 2,500 public companies. In addition to its customary reporting of trends, this time it analyzed the data by core business model - which makes for very interesting reading - and demonstrated that operationally involved CEOs have shorter tenure and higher risk than CEOs who preside over different business models.
Models of Corporate Management
The first core business model, at one extreme, is the highly diversified holding company — distinguished by its arm’s-length approach to managing its subsidiary operations. Holding companies add value through strong portfolio management. The second model is the strategic management company, which offers guidance and leadership on strategic direction and provides expectations of performance for its group of related businesses. The third model involves more active management. These corporate cores oversee more tightly linked businesses and advise on operational issues. The fourth corporate model is the highly operationally involved company, in which senior management plays an active role in day-to-day business decision making.
The corporate core model clearly seems to influence the CEO’s experience in office. For the 291 succession events that occurred worldwide in 2010, the tenure of the CEO in the operationally involved companies was unquestionably shorter and riskier. In fact, the tenure of a holding company CEO is a third longer, on average, than that of an operationally involved CEO. (The median tenure of a holding company CEO departing office in 2010 was 6.5 years, whereas the median tenure of an operationally involved CEO was only 4.9 years.) Moreover, CEOs in operationally involved companies are much more likely to depart during their first four years than CEOs in the other three models.
Tenures of Outgoing CEOs
Tenure of Insider and Outsider CEOs
Why was CEO turnover higher in operationally involved companies? It wasn’t because of inexperience: The proportion of outgoing CEOs who had prior CEO experience was higher than in any other model group. Nor was it a matter of a lack of coaching or support. The apprentice CEO model is more prevalent at operationally involved companies than at holding companies (38 percent as compared with 32 percent), and operationally involved headquarters organizations are much larger, as a rule. However, CEOs in such companies face some particular challenges:
1. Operationally involved companies are more likely to be acquired. M&A successions are most common among these firms (in 2010, they represented 52 percent of non-planned turnover, versus 40 percent at holding companies and 26 percent at strategic management companies). Because operationally involved companies typically focus on a single industry or business, they are often attractive targets for acquisition. And although holding and strategic management companies may engage in M&A activity more frequently, they typically buy and sell subsidiary units, not whole companies, so the CEO position is usually not affected.
2. Operationally involved CEOs more often succumb to board and power struggles. These struggles accounted for 57 percent of the forced (non-planned and non-M&A) turnover at operationally involved companies in 2010. By contrast, in strategic management companies, poor financial or managerial performance was the main driver of forced succession. In a single-line or closely related set of businesses, it is easier for the board to apply strict scrutiny to a CEO’s strategy, and power struggles with other knowledgeable insiders are more likely.
3. Operationally involved and active management CEOs are more likely to also hold the chairman title. This is twice as likely, on average, as it is in the other two models. Overall, only one in 10 CEOs has this dual role, but the more involved the corporate core is in the business operations, the more likely the double role is to appear. The correlation between actively engaged corporate cores and “double-hatted” CEO/chairmen is particularly strong in Europe.
At first glance, this correlation seems puzzling. Double-hatted CEOs are subject to immense job demands in any company; they run both the board — which is charged with scrutinizing their strategy — and the business. In active management and operationally invoved companies, their roles would be even more demanding. One may surmise that this trend is either an anomaly (in which case we will probably see it diminish in future years) or a sign that some boards still believe that a single leader accountable for the entire company provides the most effective form of governance.

