When Is it Time to Go?
Company leaders who overstay their welcome ultimately hurt their organization’s performance new research suggests. In addition, management expert Ram Charan argues in his latest book, “Boards that Lead,”that CEO tenure is dropping in part because of boards are no longer reluctant to pull the trigger, but also due to the fact that more and more CEOs are unable to navigate a necessary change of course.
January 26 2014 by ChiefExecutive.net
According to Business News Daily, a study by researchers at Temple University and the University of Missouri revealed that a longer CEO tenure may not always produce positive results. Specifically, they discovered that the longer CEOs stay in power, which most do by nearly three years, the more likely they are to stop reacting to market conditions and their customers’ desires, ultimately hurting their firm’s performance.
Researchers based their conclusions after examining 365 U.S. public companies between 2000 and 2010. They measured CEO tenure and calculated the strength of both firm-employee and firm-customer relationships. The study’s authors found that the longer a CEO serves, the stronger the firm-employee relationship becomes. However, an extended period with the same CEO results in a weakened firm-customer relationship over time.
According to the study, the average CEO holds office for 7.6 years, but the optimal tenure length is 4.8 years. One of the study’s authors, Temple marketing professor Xueming Luo, said as CEOs accumulate knowledge and become entrenched, they rely more on their employees for information, growing less attuned to market conditions and customers.
“Because these longer-tenured CEOs have more invested in the firm, they favor avoiding losses over pursuing gains,” Luo said. “Their attachment to the status quo makes them less responsive to vacillating consumer preferences.”
Ram Charan, a long-time management expert who advises many top CEO such as P&G’s A.G. Lafley and GE’s Jack Welch and Jeff Immelt, takes a different view. Charan argues that there is a reason CEO tenure is down and that the concern about overstaying is not as important in and of itself, provided leaders know when to change course. For one thing, the news of CEOs losing their jobs no longer draws the attention it did, and the worrying part is that the casualties will only continue to mount if leaders are not aware of the changes taking place in their world. The explanations boards give when they make a change vary in their specifics, but the underlying problem is much the same: the leader is ill-equipped to negotiate a bend in the road. The change in leadership often comes too late, when the CEO has missed the curve, and at least some damage is done. Kodak, for example, was a very strong business as late as the 1990s but wrong bets and a late reaction to the shift from film to digital photography under four different CEOs ultimately killed the business.
The twin problem of some CEO overstaying their useful life as leaders and others who are pushed out early only point to the fact that uncertainty and volatility are here to stay because the sources of such major shifts have increased exponentially. The combination of digitization, wireless, sensors, advanced analytics and software, combined with technologies, like 3D printing, are altering consumer behavior, value chains and business models. Margins are shrinking and cross-industry disruptions are now common. These are unstoppable trends that will affect virtually every business. Some businesses are going through it now, some will follow. This is where obsolescence comes in. Those leaders who cannot see this and deal with it, will pay a penalty.
The Temple and Missouri researchers contend that those CEOs who overstay become more risk averse in their later years. But Charan argues that the real challenge for CEOs is keeping the company relevant. “The ability to reposition the business. Superb cognitive skills and all the usual personality traits associated with leadership— things like the ability to communicate and motivate people and high ethical standards—continue to be important but they are the givens.”