The CEO challenge

FTSE100 - CEOs

Written by Simon Roderick & Mia Holder

The lifespan of the largest companies is shortening, as is the tenure of the CEO’s. It’s hard to get there, and when you arrive it’s high profile, high stress, and a high risk environment. So we wanted to take a closer look into this world….

The average length of service is 5 years, but if you take out the longest serving ten CEOS, this drops to 4 years.
It’s hard to look into smaller and medium sized firms, but in 2016 McKinsey carried out a study and found that the average life-span of companies listed in the S&P 500 had decreased to 18 years, down from 61 years in 1958. Whilst a huge difference, it’s not surprising given only 27 of the original FTSE 100 remained listed 35 years after its launch. Whether through mergers, acquisitions, changes in the way we live, or technology, it’s clearly difficult to stay at the top and to find an enduring business model to see off all these challenges.

The CEOs median pay fell from £3.97 million in 2017 to £3.46 million today.
When you couple it with fact that in 2017 the CEO of a large UK business only stays in the role for 4.8 years, down from 8.3 years in 2010 (PWC), the time to make an impact is short. Indeed Strategy’s CEO Success Study, which tracks CEO succession at the world’s largest 2.500 public companies, shows that UK companies have the highest turnover rate globally after Brazil, Russia, and India. The UK either has a fiercely competitive corporate culture, or we are short-termist? Either way, it’s definitely not a job for the faint-hearted. CEO’s departures don’t often happen quietly and so the risk to the individual’s reputation is high.

We looked a range of publicly available data to look into the world of FTSE 100 CEOs (age and tenure data from firms listed in June, 2019), and sliced and diced the info to come up with some interesting stats:

  • The average length of service is 5 years, but if you take out the longest serving ten CEOS, this drops to 4 years (incidentally the longest serving is Bronek Masojada of Hiscox, now Sir Martin Sorrell has left WPP)
  • By gender, the average length of service is 5.5 years for men and 3.5 years for women
  • There are less women CEO’s (only 7), but they get there quicker (average age of 52 for female CEOs vs 55.5 for men)
  • There are only 3 CEOS under the age of 45
  • Their median pay fell from £3.97 million in 2017 to £3.46 million – they will struggle along
  • However, the Wall Street Journal suggests it can take CEO’s 10 – 12 months to find a new role, with the chances of this drastically reducing after this time.
  • Robert Half found that 25% of CEO’s at FTSE 100 companies hold an MBA, with 20% being accountants. So financial training seems a good step to becoming a CEO
  • Those still on the FTSE 100 from the original list are: Associated British Foods, Barclays, Barratt Developments, Johnson Matthey, Land Securities, Legal & General, Lloyds Bank, Pearson, Royal Bank of Scotland, Sainsbury, Smith & Nephew, Standard Chartered, Tesco, Unilever, Whitbread (source Pro-active Investors/AJ Bell)
  • Those still on the FTSE 100 but with a different name: BAT Industries (BAT) British Aerospace (BAE Systems) British Petroleum (BP) Commercial Union (Aviva) Glaxo (GlaxoSmithKline) Imperial (Imperial Brands) Prudential Assurance (Prudential) Reckitt & Colman (Reckitt Benckiser) Reed International (RELX), Rio Tinto-Zinc (Rio Tinto), Royal Insurance (RSA), Shell Transport & Trading (Royal Dutch Shell) (source Pro-active Investors/AJ Bell)
Their median pay fell from £3.97 million in 2017 to £3.46 million today
Any high profile role is demanding and none more so than leading a FTSE 100. The shortening of the firms’ lifespans and the tenure of CEOs means it is a challenging and high risk environment, with an uphill task if you want to find another role afterwards.

How does this impact strategy? Well it’s hard to tell, but it probably doesn’t encourage long term thinking, investment in new projects, and it possibly encourages more focus on cost saving to drive profitability (this may be why there are so many CEOs with backgrounds in finance featuring in the list). If you knew that a relatively short period of under performance could cost you your job, and reputation, how loyal and emotionally invested would you be? It’s hardly unsurprising that they are keen to secure large cash payments in this type of environment.

Most CEOs are employees, rather than owners, and whilst there is much talk of stability and an ownership culture in the media, it appears that the opposite is happening in reality. Shareholders need to examine what they want from a CEO, they can’t talk about the long term and ownership in a climate that is clearly short-term focused. Even for growing firms, shareholders need to appoint someone with the skills to grow a firm and give them time to effect this change. This is no different than smaller firms, where it is harder to find information to analyse.

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