The Great CEO Exodus

An impatient Street and stepped-up oversight have CEO turnover in overdrive. Will business suffer?

When the doors slid open at the end of Tom Freston's final ride down the elevator at Viacom Inc.'s (VIA ) Times Square headquarters, it was to a lobby jammed with nearly 2,000 employees. They gave him a teary ovation, shouting "Tom! Tom! Tom!" A heartwarming show of support, all right, but love and admiration from the rank and file didn't prevent the 26-year veteran from getting fired three days earlier. Sumner M. Redstone, Viacom's chairman and largest shareholder, had been unhappy with the lagging stock price and decided Freston wasn't moving fast enough to turn things around. Freston was in the job for just eight months.

His tenure may have been especially brief and the details of his ouster peculiar to his situation, but Freston's story is becoming all too familiar. Already this year, 1,112 chief executives have left the corner office, both voluntarily and not. CEO turnover, in fact, is on pace to exceed last year's record 1,322 exits, according to Chicago consulting firm Challenger, Gray & Christmas Inc. The departures so far in 2006 include the honchos of some of America's best-known companies: Ford Motor (F ), Kraft Foods (KFT ), Nike (NKE ), Pfizer (PFE ), RadioShack (RSH ), UnitedHealth (UNH ) -- the list goes on.

Yes, it's hard to feel sorry for CEOs when they take home at least 300 times what the average worker makes each year. Certainly, many of those leaving are going for good reason. Headline-grabbing exit packages often seem little more than a reward for failure. And the options backdating scandal ricocheting around Silicon Valley and elsewhere is often a testament to runaway greed. On Oct. 15, it claimed yet another head, that of United Health Chief Executive Dr. William W. McGuire, who plans to retire before Dec. 1.

Then again, intense global competition, a Street impatient for results, and regulators on the warpath are all contributing to corner office angst, too. CEOs feel understandably beleaguered, expecting the ax to fall any moment. "I'm always two quarters away from being a horse's ass," says Paul R. Charron, 64, CEO of Liz Claiborne Inc. (LIZ ), who's stepping down in November after a strong 12-year run. "The market has a very short attention span. It's easier to criticize than to construct. You can get whacked in so many ways." And with the average CEO in the job just seven years today, almost two years less than two decades ago, some worry that short-term thinking is taking a toll. "Who will build the long-term future of these companies?" asks Yale School of Management professor Jeffrey A. Sonnenfeld.

The horse Liz Claiborne's board is betting on is William L. McComb. He's a 43-year-old powerhouse who has jumped from one business to the next, six in all, during a fast-track 14-year climb up the ranks at Johnson & Johnson (JNJ ). Coached by management guru Ram Charan, who compares his appetite for learning on the job to that of another client named Jack Welch, McComb has often had to get up and running on a new enterprise quickly.

100-DAY WINDOW

Running Liz Claiborne may prove to be a challenge of another magnitude. Not so long ago, a new CEO like McComb would have had six to nine months to get his act together. Not any more. Management experts say the newly minted boss has about 90 to 100 days to start implementing strategy. For McComb, that's not much time to learn an unfamiliar industry, not to mention a company that operates in 80 countries and counts department stores among both its biggest customers and toughest competitors. "These transitions are like jumping on a moving train," McComb says. He plans to spend much of his first months talking to staff, trying to win their loyalty, and teasing out of them how the company can best grow.

Like Liz Claiborne, more companies are looking outside for their next leader. Finding him or her isn't easy, despite all the talent floating around these days. Gerard R. Roche, senior chairman of leading recruiter Heidrick & Struggles, says it's getting harder to fill high-level openings as more candidates opt to work at private equity firms or run private companies. "We have to work harder than we used to," says Roche. "We used to think, 'tell us your need and we'll give you half a dozen candidates.' Now [those candidates] say, 'I've been talking to Blackstone and Kravis and I'm thinking about going private.'"

And even when companies find a suitable outsider, it's often not an ideal situation. Harvard Business School professor Rakesh Khurana says outside CEOs often focus on their most powerful constituencies -- their board and investors -- to the detriment of the businesses themselves. The instinct has become all the more prevalent with the rising clout of hedge funds, which are more than willing to share their views. "You now see a lot of CEOs who are not internally focused," says Khurana. "For them, the people in a company, what the company produces, the services it provides are abstractions."

And you know something smells bad when soon-to-be CEOs spend much of their contract negotiations focusing on their inevitable departure. "When we put together a contract we are absolutely thinking about the end, the next job," says Wendi S. Lazar, counsel to Outten & Golden LLP, a New York employment law firm that represents executives in finance and elsewhere. "We're not getting paid to celebrate the wedding." Lazar's goal not only is to make sure that her client gets paid on his departure what he would have earned had he stayed, but that he is made whole for unvested options or restricted shares he left at the old job, too. Lazar expects the Securities & Exchange Commission's push to limit exit pay will only prompt CEOs to demand more pay up front to compensate.

Hired guns, focused as they often are on short-term gains, may have an edge with Wall Street, but in-house candidates know a company's people. And like Freston, they often have their employees' backing. In researching his best-seller Good To Great, management guru Jim Collins found that of those companies whose stocks outperformed the competition over the long term, 90% had a homegrown CEO. Why did they do so well? Because they knew which people on staff were good and where best to deploy them.

Even so, Collins notes that most of these CEOs didn't get their program humming until seven years into their tenure, just when the average company boss today is walking out the door. "The best chance for spectacular results comes from insiders who have enough time to lay the foundation that will lead to them," says Collins. "If we're systematically lurching for saviors and shorting the amount of time a CEO gets, we're on a systematic path toward increased mediocrity."

Sometimes a chief really does need help. For nearly five years as Ford Motor Co.'s (F ) CEO and chairman, William C. Ford Jr. dealt with Wall Street, falling credit ratings, and market-share losses -- all the while trying to overhaul the automaker's manufacturing, engineering, and labor relations. When it became clear that Ford would have to revise its profit target again from 2008 to 2009, says one top executive, "I think he knew it was finally beyond him."

Ford kept the chairmanship but hired as CEO Boeing Co. (BA ) veteran Alan Mulally, who was named on Sept. 5. Mulally at long last has the CEO job he craved. But like every other corporate chieftain these days, he faces a ticking clock.

By Nanette Byrnes, with David Kiley in Detroit, Roger O. Crockett in Chicago, and Tom Lowry and Jena McGregor in New York

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