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CEOs of troubled companies are getting less and less time to show results

Gina Chon

If the first five months of this year are a sign, CEOs of troubled companies should be on notice that their tenure might not last much longer. A rise in shareholder activism, coupled with boards that have become more comfortable letting go of underperforming leaders, has produced a rash of departures in the C-suite. That puts more pressure on boards to make a better choice the second time around.

Consumer products firm Procter & Gamble was the latest company to make a CEO change. In an evening announcement just before the Memorial holiday in the US, the maker of Pampers diapers replaced Bob McDonald with his predecessor, AG Lafley. In April, retailer JC Penney rehired Mike Ullman to replace Ron Johnson as CEO. Ullman was Johnson’s predecessor. Online deals firm Groupon, Internet radio company Pandora, and gaming firm Electronic Arts have also seen their CEOs step down or be fired.

An annual study of the world’s 2,500 largest public companies, published in April by consulting firm Booz & Co, showed that the CEO turnover rate globally rose to 15% in 2012—the second highest level since 2000. It also showed that more than ever, companies were planning for CEO successions. Gary Neilson, a senior partner at Booz, said boards preferred to keep CEOs on during the financial crisis, but now they were doing more to plan for an orderly leadership transition.

But many of the CEO changes this year have been abrupt, leaving some companies without an immediate permanent replacement. And boards that wait too long before making a leadership change or hire a poor choice for a new CEO should also be on the alert for shareholder wrath.

The vigilance of P&G directors, many of whom are CEOs themselves, is being questioned in the wake of McDonald’s departure. Because of their own high-profile jobs, the charge is, P&G directors may have been distracted when they should’ve let go of McDonald sooner.

Another example could be JC Penney, where sales continue to fall. The jury is still out on whether Ullman can turn the retailer around, but shares dipped when he was named as Johnson’s replacement. If sales don’t improve, JC Penney shareholders could decide that the company needs new directors, too.

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