KOREA CAPITAL MARKET INSTITUTE

A chief executive officer (CEO) is a firm’s ultimate decision maker and is responsible for developing and executing corporate strategy and allocating resources consistent with strategic direction. In addition, the CEO acts as an agent for shareholders, the principals of the firm, with the authority to make decisions that are in the best interests of shareholders. Therefore, it is one of the most crucial decision in a firm as well as the core duties of the firm’s controlling shareholder and board of directors to appoint a competent CEO who can develop and implement the right strategy for the firm, to timely replace an incompetent CEO, and to provide reasonable remuneration.

The importance of the CEO is no exception to the securities industry. In order for Korea's securities industry to advance to a higher level with global competitiveness, it is essential to have a CEO who can establish a management strategy to achieve the vision of the firm and consistently pursue the strategy over a long period of time.

Based on this motivation, this report is prepared with the following objectives.  First, in order to obtain accurate description of CEO appointment, tenure and turnover (replacement) in Korea’s securities industry, we collect and analyze related statistics. Second, we analyze the relationship between CEO tenure and performance. Third, we examine the efficiency of CEO selection and turnover in domestic securities firms, ie, whether a competent CEO is appointed, and whether CEO turnover reflects management performance. And we draw some implications from these results.

The 'two to three year tenure' of professional CEOs (those who are not controlling shareholders) appears to be the norm in the domestic securities industry, and this tenure is shorter than that of major investment banks and securities firms CEOs in the US and Japan. However, while short-tenure CEOs with two to three year tenure account for a large proportion, at the same time, there are some long-tenure CEOs with tenure longer than six years as well.

Long-tenure CEOs generally showed better performance than short or mid-tenure CEOs, and their performance improved steadily as the year progressed. In addition, the effect of long-term management performance on CEO turnover decision was not significant. This suggests that CEO turnover in domestic securities industry does not have the effect as discipline (corporate governance) mechanism. And the week relationship between management performance and CEO turnover decision is more apparent in securities firms whose controlling shareholders also have a significant stake in other industry (securities firms belonged to business groups, for instance). This suggests that group situations other than CEOs’ management performance may have been taken into consideration in CEO turnover decision in those securities firms.

The results of this report provide some implications for the tenure, appointment and turnover of CEOs of domestic securities firms. First, the rigid framework of 'two to three year tenure’ causes some problems. At present, many CEOs of securities firms have to leave the CEO position before producing visible results from their own management strategy reflecting their vision and philosophy due to their short tenure, and their successor must start again from the scratch. The absence of investment for long-term capacity accumulation such as differentiated services or networks of securities firms is likely due to the short tenure of the CEO. The unique capacity of a securities firm to differentiate itself from other firms can be achieved when a consistent management strategy is pursued over a long period of time. Therefore, the practice of replacing CEOs every two or three years needs to be changed.

The superior performance of long-tenure CEOs can be attributed to the fact that a good candidate with excellent management expertise has been appointed to the CEO and that controlling shareholders gave him trust and opportunity. In other words, an effective CEO selection process is an important precondition for producing a successful long-tenure CEO.

During two to three years immediately after the CEO is appointed, the performance of the CEO may be influenced by the legacy of his predecessor, including the management activities and organizational structure. In addition, it takes time for new management strategies to be recognized in the market. For this reason, it may be very difficult or even undesirable to evaluate the CEO with the performance of two or three year period right after his appointment. At the same time, however, the CEO turnover policy is an important discipline mechanism that induces the CEO's best efforts. In summary, securities firms should wait patiently during the early period of their CEOs’ tenure, and after that, they should establish a solid CEO turnover policy based on their performance and encourage CEOs to exert their full potential.