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Is There Such Thing as an Optimal CEO Tenure?
Jaap de Jonge, Editor
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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Reduction of CEO´s Dynamics and Shareholder ReturnsJuergen P. Mueller MBA, Member Indeed it is important to look out for companies where CEOs have returned to be managers. Nothing new about these results according to standard business life!
CEOs are (wo)men as well, introducing themselves to the comfort of a position like CEO. That's why indeed stimulation and incentives have to be arranged, such as looking for ideas in foreign university or business school faculties.
Life (and a CEO) have to be renewed sometimes. |
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The Best Length of Tenure for a CEOAndrew Blaine, Member In my opinion, the optimal length of tenure for a CEO can only be determined based on the following four questions:
1. What is the current state of the business? Often highly positive results follow the change in CEO. What is little appreciated is that, in many instances, this success is from the realisation of the plans put in place by the outgoing CEO and has little to do with the new arrival. The new CEO needs to "feel the waters" and, generally, let's the business run as before during this phase;
2. What do I want to achieve as CEO? During the initial phase the new CEO is both assessing the current situation and planning the way forward towards their identified end position.
3. How long do I estimate it will take? (Or how long have I got to fix it?) In this phase the CEO turns ambition into action and the new phase starts; and, finally
4. And then what? The danger here is the CEO starts to relax and stops/reduces planning - hence the downturn and it's time for a new CEO. |
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