Is There Such Thing as an Optimal CEO Tenure?
In an interesting article "Long CEO Tenure Can Hurt Performance" (HBR March 2013) by Professor Xueming Luo, Vamsi K, Kanuri and Michelle Andrews results are disclosed from a study the authors did among 356 US companies between 2000 to 2010 analyzing the correlation between CEO tenure (~length of time serving in position of responsibility) and total shareholder returns.
The researchers found that CEOs create most shareholder value in their first years and argue this due to 2 factors:
- The firm-employee dynamic - This keeps improving the longer a CEO serves, growing shareholder value.
- The firm-customer dynamic - This strengthens only for a time and then weakens.
The optimal length of time served reported (for this group of companies in this period!) was actually 4,8 years...
Boards are advised to stimulate long-tenured CEO to keep spending a lot of time and effort on the firm-client relationship. To achive this, incentives plans for such leaders should focus heavily on consumer and market results. This will keep CEOs focused on understanding and learning client and market dynamics.
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