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Unintended Consequences of the Shorter Shelf Life of CEOs

Recent weeks have not been kind to CEO tenure. Hank McKinnell’s ouster at Pfizer, after the board had set up …

Recent weeks have not been kind to CEO tenure. Hank McKinnell’s ouster at Pfizer, after the board had set up a three-way contest-meant to last until 2008-to succeed him, came earlier than expected when it pulled the trigger and named Jeffrey Kindler, Pfizer’s general counsel since 2002, to replace him. Hopes that investor sentiment might bend BP’s retirement rule forcing John Browne to step down as CEO when he reaches 60 in February 2008 were unceremoniously dashed when BP non-executive chairman Peter Sutherland demanded that Browne “end the uncertainty” by issuing a statement declaring that Browne would depart in 2008. It was not the first time the pair had clashed, but considering that Lord Browne was voted the U.K.’s most admired CEO four years running, it still came as a jolt.

Then there are the ever more numerous notices that don’t receive headlines. For example, Edward Mueller stepped down as CEO from Williams-Sonoma following news that the San Francisco-based firm lost a quarter of its stock market value so far this year. Howard Lester, the non-executive chairman who served as Williams-Sonoma CEO from 1979 to 2001, was brought back as CEO. Similarly, Cooper Tire & Rubber named one of its outside directors, Byron Pond, himself the former CEO of Arvin Industries, as interim CEO after Thomas Dattilo resigned as CEO. The move came at a time when lower demand and higher material costs tripled the tire company’s second quarter loss. The board at Ligand Pharmaceuticals replaced CEO David Robinson with a board member, Henry Bissenbach, a retired CEO of drug distributor BioScrip, while the company looks for a permanent CEO. Microturbine technology company Capstone Turbine turned out its CEO, John Tucker, who also resigned from the board and was replaced by Mark Gilbreth, Capstone’s COO, while the company searches for a replacement. Car repair and parts retailer Pep Boys-Manny, Moe & Jack-ousted Larry Stevenson as CEO and director for “undisclosed reasons” and replaced him with non-executive chairman, Bill Leonard, until a permanent successor could be found.   

In many cases the unexpected resignations are performance related. But not all cases are clear-cut. Just as former Frito-Lay chief Irene Rosenfeld was tapped to replace Roger Deromedi as CEO of Kraft Foods, second quarter results at the nation’s second largest food and beverage company appeared to show that Deromedi’s efforts were paying off. The company as much as admitted that they are continuing with the current growth strategy. Last April, the board of Archer Daniels Midland replaced G. Allen Andreas with former Chevron EVP Patricia Woertz. Allen Andreas, the nephew and handpicked successor to ADM’s storied Dwayne Andreas who led the agri-giant for 27years, Allen Andreas, did not sit on the board committee that selected Woertz although officially he was consulted. Sources say the able 62-year-old chief was eased out earlier than anticipated by an independent board that wanted to make way for new leadership.

CEO tenure in the corner office is edging downwards, according to executive recruiting firm Spenser Stuart, which has tracked job length data for  Fortune 500 and S&P 500 CEOs for the past 25 years. In 1980, a CEO could expect to serve an average of eight years. By 2005, that number was seven and dropping to five years for the F500. If one controls for outliers that distort averages the picture is even less sanguine. Median tenure for the S&P 500 CEO is just five years.

One might think that the executive recruiting fraternity would be popping champagne corks with all the new business falling their way. Yet Christian & Timbers CEO Brian Sullivan is somewhat circumspect. “There’s no question boards have been quicker on the trigger since the corporate scandals and the passage of Sarbanes-Oxley,” he says. “But it has also taken its toll. CEOs who had six months to learn the job and six months to start implementing their strategy now have six weeks to figure everything out.”

Some highly qualified candidates, reports Sullivan, are often reluctant to take the CEO job, or won’t move until a generous severance package is in place. In other words, as a consequence of actions designed to monitor CEO performance and limit CEO pay, deals with higher severance packages are being driven higher. “People naturally want to protect themselves knowing that the risks are greater,” adds Sullivan.    

Nor is Sullivan alone. “Quick turnover is not necessarily good for shareholders unless obviously the company is underperforming,” says Spenser Stuart’s Tom Neff. “Boards need to be careful that they don’t pull the trigger too quickly because of external pressures. If the board acts precipitously, any succession plans will likely not mature to provide a smooth transition.” 

Some executives are increasingly hesitant to serve in public companies and are open to alternatives such as private equity to avoid public company scrutiny. The increasing disadvantage of being a public company is Wall Street’s excessive attention to short-term results, whereas management should be focusing on long-term performance for shareholders.”

“There’s no shortage of people wanting to be CEO,” adds Clarke Murphy, head of the Americas for Russell Reynolds Associates, “but in this short-term environment many complain that there isn’t time to do what needs to be done. In addition, the costs of turnover are higher when you take into account that companies have to pay more in terms of restricted stock awards to attract able leaders.”

Performance pressure has led to increased CEO turnover and in many cases to the sale of companies to private equity firms. But the most profound change has been the shift in executives’ attention toward meeting investor demand for immediate profitability. Planning for long-term growth is rather tricky if one’s time horizon is barely five years. As a result CEOs have had to change the way they think about their tasks, roles and responsibilities.

For example, one of the most important assets a company can develop in a globalized economy is smart and savvy people. When Sony introduces a new version of PlayStation, Microsoft must up the ante with a new version of the Xbox or get out of the business. But developing and nurturing talent takes time-and a steady eye for the future. Sophisticated information systems and streamlined supply chains help, but in the end it’s talent and flexibility that will provide the only true competitive edge. In their recent book, “Innovation,” Curtis Carlson and William Wilmot describe a telling story about a security vulnerability discovered in Linux.  “A person in Germany e-mailed a friend in the U.S., who got others involved, and within 24 hours the problem was fixed. Tapping into knowledge, ideas, and skills over the Internet can be powerful when people care.” Contrast this with an organization whose leadership is distracted by short-term concerns.  How much time would it take to get it fixed-days, weeks, months, never?

Don’t misunderstand, the focus on economic performance must remain and CEOs need to be held to account if it slips. But perhaps the definition of performance needs to be rethought. Too many CEOs and too many boards are content to view performance largely in terms of cutting costs as opposed to upgrading assets such as skills and training for our workforce. Productivity growth is perhaps the clearest single indicator of a nation’s economic health. Fundamental to productivity growth is an engaged, skilled workforce. A recent study conducted by ISR, a global HR research and consulting firm, documented links between an engaged workforce and financial performance measures such as net income, operating income and EPS. “There’s a well-substantiated link between employee engagement-the extent to which employees are committed, believe in the values of the company, feel pride in working for their employer and are motivated to go the extra mile-and business results,” said ISR Global Research director Patrick Kulesa. (The study covered employees of 70 major companies operating in global markets in 2005.)

Most dramatic among its findings was the almost 52 percent gap in the one-year performance improvement in operating income between companies’ highly engaged employees versus those who were not engaged. Other findings include a 13.2 percent one-year improvement in net income for companies with high employee engagement, while seeing a 3.8 percent decline in net income over the same period for companies with low employee engagement.

“If CEOs hope to defeat the Wall Street beast,” says James O’Toole, USC professor and author of The New American Workplace, “they need to devote the time necessary to build an asset that will give them a true performance advantage.”

If you would like to speak out, please eMail me at: jpdonlon@chiefexecutive.net


Dear JP:

In your editorial, “The Real Thing,” you encouraged us all to pause and then to give a standing ovation €¦ to an executive assistant. 
 
Your candid report revealed the “untold story” about the real but unsung heroine at PepsiCo who helped thwart the attempted piracy of Coca-Cola secrets. “PepsiCo’s crucial part in the affair was handled by an executive secretary and her opposite number with the company’s general counsel.”  Not only is this a great story, PepsiCo’s Steve Reinemund gives her full credit.  That’s corporate integrity at work and at its best.
 
It is, as you said, “The Real Thing.”  The only thing we’d like to know is her name so we can send her a spiritual bouquet of gratitude €¦ and admiration. 
 
As Steve retires from PepsiCo’s corner office, he will take many pleasant memories with him.  This one has to be among the sweetest as he thanks the assistant on whom he could rely to act with speed and deliberation.
 
Salute to one and all!

Marty
 
Dr. Martin J. Murphy
Chairman & Chief Executive Officer
AlphaMed Consulting, Inc.


Interesting analysis.  Within the past week I read another article which developed a correlation between CEO tenure and stock performance.  The conclusion was that investors should look for companies where the CEO tenure is > five years . . . just about the average cited in your article.
 
John Blair



Your statistics regarding employee engagement as cited in the article “Unintended Consequences of the Shorter Shelf Life of CEOs” show that the person at the top must not only be a smart business strategist and someone who has an ability to execute that strategy, but also someone who excels at the selection and motivation of people.  Having a truly engaged workforce is where the real competitive advantage lies and until corporate America recognizes this with more than words, we will not see excellent long-term financial performance of companies. 
 
Key to gaining this competitive advantage is having an HR leader who is able to execute on the vision of the CEO through employee attraction, selection, performance management, development, succession and retention.  The HR leader actually IS critical to the ongoing success of the firm.  Even today, with so much talk of Human Resources having a seat at “the table,” many companies are not ready to see HR as anything more than a law enforcement unit that minimizes potential liability to the company.  Is it that HR leaders aren’t ready to offer more?  Or is it that companies aren’t willing to look for more?  It becomes a chicken and egg type of question.  Jack Welch mentions in “Winning” that most often his best HR people were first business leaders or functional leaders in another function prior to becoming HR leaders.  Stating in a job description that you want an HR leader who is first a business person and second an HR person is fine — but then don’t look for someone with 20 years of HR experience!  Get a business person with a keen understanding of the importance of employees and how to best get more of what they have to give to the organization.  Turnover will go down and productivity and profitability will go up.  If you could raise your employee’s engagement level from the average 50 to 70% level up to an 80 to 100% level, think of the impact that would have on the bottom line!  Now what would that HR leader be worth to your organization?
 
Best Regards,
 
Paul D. Brubaker
Yorba Linda, CA  92886

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