European CEOs Play Musical Chairs

Top execs are falling at a record pace. Is that good?

James J. Schiro is going through a baptism by fire. The 56-year-old American landed in the chief executive's chair at Zurich Financial Services in May, as the insurer was on its way to posting a record $2 billion first-half loss. Schiro's predecessor, Rolf Huppi, was dumped under pressure from shareholders. Now, the heat is on the new CEO to replenish severely depleted reserves, cut costs, and sharpen the Swiss company's strategic focus. As if that weren't challenge enough, Schiro has no insurance industry experience. He's the former CEO of accounting giant PricewaterhouseCoopers. What's more, he has never lived in Europe before and doesn't speak German.

Schiro isn't the only CEO in Europe scrambling to get his bearings. In the past six months, seven of Europe's 35 biggest companies have replaced their top executives. They include troubled national icons such as Deutsche Telekom (DT ), France Télécom (FTE ), and Fiat Group (FIA ), as well as global media giant Vivendi Universal (V ). At least a half-dozen others, ranging from French engineering group Alstom (ALS ) to German media group Bertelsmann, also have given their CEOs the ax. Executives of other companies such as Graham Wallace of Britain's Cable & Wireless PLC (CWP ), are under pressure to step down. Until recently in Europe, "CEOs tended to stay put unless something went disastrously wrong, or they retired," says Mina Gouran, managing vice-president of executive search firm Korn/Ferry International in London.

No more. In fact, European companies are now more likely than their U.S. counterparts to fire the boss during hard times. A recent study by consulting firm Booz Allen Hamilton Inc. found that from 1995 to 2001, CEO ousters at Europe's biggest companies rose 145%, more than twice the rate of increase in the U.S. According to the study, 34% of European CEOs who left their jobs in 2001 were forced out because of performance-related concerns, compared with only 22% in the U.S. The average tenure of a Euro- boss is now 6.5 years, compared with 9.5 years in the U.S.

The reasons aren't hard to fathom. Corporate Europe is mired in a global downturn that has clobbered earnings and sent share prices into a swoon. Shareholder activism is on the rise, with foreign investors holding stakes in companies formerly owned by more tolerant home-country shareholders. Some beleaguered companies, such as Zurich Financial (ZFSVY ) and Britain's Royal & Sun Alliance Insurance Group (RSA ), have dumped their CEOs in hopes of reassuring financial markets in advance of share issues. Bankers are tightening the screws, too. Vivendi's ex-CEO, Jean-Marie Messier, was finally shown the door when banks refused to extend more credit.

In this unforgiving climate, the new CEOs know they have to act fast. Jurgen Dormann, who took the helm at Swedish-Swiss engineering group ABB Asea Brown Boveri Ltd. (ABB ) in September, has announced plans to lay off 10,000 of 148,000 workers. At Zurich Financial, Schiro has raised $2.5 billion in fresh capital and cut 4,500 of 75,000 jobs. "We must ensure that we can fully participate in the upturn in the current insurance cycle," says Schiro.

Tough bosses for tough times. Nothing wrong with that. The only question is whether the Europeans, after giving their CEOs far too easy a ride for years, are now erring in the opposite direction. Consider Zurich-based Swiss Life, which is on its third CEO this year. The current boss, former Credit Suisse Group executive Rolf Dörig, was hired in November to replace Roland Chlapowski, who was sacked after only nine months in the face of a mounting crisis over accounting errors and management perks. The insurer's shares have plunged almost 80% this year. Likewise, French smart-card manufacturer Gemplus has posted steadily worsening results as it has replaced its CEO twice in less than three years.

The Europeans are getting into the revolving-door act just when the latest research questions the wisdom of precipitous firings. Margarethe Wiersema, a University of California at Irvine management professor, tracked U.S. companies that kicked out their CEOs in 1997 and 1998. Reviewing their performance two years after new CEOs took charge, she found no significant improvement in operating earnings, return on assets, or share prices. Says Wiersema: "I couldn't find a single measure suggesting that CEO dismissals have a positive effect on corporate performance." Sure, Europe can point to executives such as Carlos Ghosn, who has turned around Nissan Motor Co. (NSANY ) since Renault dispatched him to Japan in 1999. But few new CEOs produce dramatic improvements so quickly.

One issue is whether Europeans are paying enough to attract top-notch talent. True, Ron Sommer received a $13 million golden parachute when he was forced out of Deutsche Telekom last summer--but his annual salary as boss for most of his tenure was about $1.5 million. Europe is catching up. At France Télécom, CEO Thierry Breton will earn $1.2 million, more than four times the salary of his predecessor, Michel Bon. French smart-card manufacturer Gemplus (GEMP ) has raised eyebrows in France by offering a $5 million package to lure former AT&T (T ) president Alex Mandl.

Yet those salaries still pale beside the packages offered to some job-hopping U.S. executives. WorldCom, for example, has promised incoming CEO Michael Capellas upwards of $30 million in stock if he pulls the company out of bankruptcy next year. "There's still a big difference in stock-based compensation" between Europe and the U.S. says Michael H. Kramarsch, managing partner of executive-compensation firm Towers Perrin in Frankfurt.

If European corporate boards are increasingly willing to pay closer to U.S. scale, they often fall back on Old World methods when picking a new CEO. Vivendi Universal's new CEO, for example, is Jean-René Fourtou, a well-regarded pharmaceutical executive who admits he knows nothing about Vivendi's core media business. Fourtou was chosen in a backroom deal orchestrated by his friend Claude Bébéar, the French financier. Outsider CEO replacements such as Zurich Financial's Schiro are still rare. Most boards seldom look beyond a small circle of well-connected candidates within their own national borders. "It's all done by word of mouth, and the ones making the decision think they know everybody already," says Luca Pacces, managing director of the Spencer Stuart search firm in Milan.

It's too early to pass judgment on the new crop of European CEOs. But the markets aren't cutting them much slack. Vivendi's share price has slumped more than 30% since Fourtou took the reins in July. Deutsche Telekom shares are down nearly 50% this year and haven't budged since Kai-Uwe Ricke was hired in early November to replace Sommer. At least Ricke knows the business. He ran DT's mobile division. But he also was an architect of one of Sommer's biggest blunders, the $39 billion purchase last year of U.S. wireless company VoiceStream. As for Zurich Financial Services? Its share price is down 52% since American Schiro came aboard. Looks like the new CEO may be too busy to learn German anytime soon.

By Carol Matlack in Paris, with Jack Ewing and David Fairlamb in Frankfurt

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