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By Ashley R. Harris
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Merrill Lynch's newly named chief executive, John Thain, has an impressive track record. Before taking the job at the giant brokerage firm, Thain needed just four years to set things right at New York Stock Exchange which had been plagued by scandal at the hands its former head, Dick Grasso. And in his five years as president and chief operating officer at Goldman Sachs, Thain further distinguished himself by helping spearhead the company's IPO in 1999.
But will Merrill's board give him as long as 4 to 5 years to show results? Perhaps, but he'd still better hit the ground running. According to an annual Booz Allen Hamilton study on CEO turnover published in May, boards are "quicker than ever to replace underperforming CEOs." When the study originally published in 1995, one in eight chiefs were forced out of office. In 2006, nearly one in 3 left involuntarily.
So why has chief executive tenure become so tenuous? Since the Enron and WorldCom fiascos, holding the heads of public companies accountable sooner rather than later is a matter of protecting public interest, says Bernard Anderson, professor of management at The Wharton School at The University of Pennsylvania. "Executives are being held to a much higher standard of accountability and transparency," says Anderson, alluding to the stricter corporate governance regulations imposed by the Sarbanes-Oxley Act of 2002.
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Not only has oversight increased, so too has performance pressure--from several fronts. "Institutional shareholders have less patience too," says Stephen Kaufman, professor of management at Harvard University. Not surprisingly, mutual and pension fund managers don't want to take the fall if a company in their investment portfolio fails. Says Kaufman: "If a company's CEO is doing a poor job, it is better he loses his job, over everyone else." That may help explain why 32 percent of departing CEOs were forced to resign either because of poor performance or disagreements with the board.
That much of a churn presents new problems. "There's a risk to getting in the habit of revolving door CEO-ships," he said. "Demanding results faster than the CEO can produce creates waves, which tends to cause the good people to leave."
In addition to boosting morale at Merrill, Thain will have plenty of other issues to deal with. The brokerage has already taken an $8.4 billion writedown at the hands of outgoing CEO and chairman Stanley O'Neal. And, for the moment, few outside Merrill's boardroom really know how much more bleeding the company has to do after its brutal beating in the subprime mortgage market.
But Thain may find solace buried in Booz Allen's study. While turnover at the top has increased, those chiefs who manage to survive the first few tumultuous years average 9.8 years of service. Hold on John, hold on.
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