Given the widely held expectation that the U.S. economy will accelerate this year, it's disconcerting to see that more U.S. chief executive officers are leaving their jobs than at any time since the financial crisis. Makes you wonder if they, or their employers, know something the rest of us don't.
U.S. employment consultants Challenger, Gray & Christmas Inc. reported Wednesday that, according to their survey of U.S. companies' announcements, SEC filings and news, 66 CEOs left their jobs in the first three months of 2014, the highest quarterly number since the third quarter of 2008. That, you might recall, was the eve of a massive global financial crisis and deep recession – a time when, understandably, executive job security was fraying badly.
While there is certainly a seasonality to Challenger's CEO-departure numbers (the beginning of the year and annual-meeting season tends typically generate higher-than-average turnover in the corner office) it should be noted that this year's first quarter had considerably more departures than normal for the time of year (11 per cent above the 10-year average), and was also the highest since 2008. Similarly, the March departures (123) were the highest for the month since 2008, and were 14 per cent higher than the 10-year average.
A few more CEOs in the unemployment lines is in itself hardly cause for concern; they can weather it far better than most of the 10.5 million other unemployed Americans. But elevated Challenger CEO-turnover numbers are typically associated with less-than-healthy conditions.
The indicator spiked in late 2006 and early 2007, in advance of the U.S. slipping into recession, and again throughout 2008, with most of the damage coming before the financial crisis began in earnest. On a smaller scale, departures also seem to have accelerated ahead of stock-market corrections in both 2010 and 2011. For whatever reason, a rise in departures appears to anticipate bad news and business slumps.
At the root of this may be a link between CEO departures and corporate earnings trends. Over the past decade, the heaviest years for CEO turnover have either preceded or coincided with a downturn in S&P 500 earnings growth. And while only a few permabears are calling for economic disaster to befall companies and their CEOs in the next year, an earnings downturn is a different story.
After four straight years of solid earnings-per-share growth, the S&P 500 is expected to post flat year-over-year earnings per share in the first quarter. (The quarter's earnings reporting season kicked off this week). While Wall Street analysts are still optimistic that 2014 as a whole will enjoy solid (if unspectacular) growth, it's evident that the current earnings cycle is looking long in the tooth.
This cycle has been characterized by profit growth through subtraction. Corporate America has cut costs and resisted spending, while propping up earnings per share by pouring money into share buybacks. The result has been record-high profit margins that, frankly, are unsustainable.
Maybe companies and their CEOs are seeing the writing on the wall – that the heady days of post-recession profit growth are over. Perhaps some CEOs are taking their bows and walking off stage. Maybe companies are recognizing that the next wave of profits will need to be driven by investment and growth, rather than cutting and saving, and are seeking new management at the top with a different skill set that will make this happen.
Either way, the high CEO turnover may be a wake-up call to the market. Companies see a change coming, and investors had best be on the lookout.