With CEO Tenure, Short is Sweet
The prospect of shortening the CEO’s tenure comes at a time when overall CEO tenure is shrinking — a development talent experts say is linked to the pace of change in the economy.
Some say shorter tenure at the top might help companies stay agile in an ever-changing business environment.
When Jeff Immelt assumed leadership of General Electric Co. in 2001, it was with the expectation that he would hold the position for the next 20 years, just as his predecessor, Jack Welch, did.
Now in his 13th year at the helm at the conglomerate, published reports suggest his tenure — and those of future GE chief executives — may be shortened.
Though neither Immelt nor GE has confirmed the story, the prospect of shortening the CEO’s tenure comes at a time when overall CEO tenure is shrinking — a development talent experts say is linked to the pace of change in the economy. According to a 2014 report released by The Conference Board, the average tenure of a departing S&P 500 company CEO has decreased in recent years, from roughly 10 years in 2000 to 8.1 years in 2012.
This more rapid turnover in leadership makes sense when considering the competitive nature of a constantly changing global market. According to Brian Kropp, managing director at the member-based advisory firm Corporate Executive Board, it’s unrealistic nowadays to expect a single person to possess the skill set necessary to be an effective leader for two decades.
“One of the things that happens when you have people in the seat at the senior level for such a long time is that they are still very good people, but the world around them changes and they are not often able to keep up with that change,” Kropp said. “So while they’re committed to the business, love the company and are visions of what we want to see in a senior leader, the reality is that the world has changed around them and often their skill set and capabilities haven’t evolved to keep up with that.”
Industry trends show that corporate boards are making a point to consider their CEOs’ effectiveness on a consistent basis. The Corporate Executive Board surveyed chief human resources officers about how their boards of directors are dealing with CEO succession. HR heads report that 32 percent of boards admit that the individual they have at the top level is no longer the right person for the job.
Additionally, 40 percent of boards say that CEO succession is one of the most important issues they address, and that discussions of CEO performance and succession take up an average of an hour and half of each board meeting.
“It’s become a big time investment of the board,” Kropp said. “If the philosophy is for the CEO to only be there for a couple of years, then this needs to be an ongoing conversation that the board is having with the CEO and with the head of HR about what should be happening in the organization.”
What’s more, a recent study out of Temple University’s Fox School of Business found that the ideal tenure for a CEO is 4.8 years. Xueming Luo, a professor of marketing at the school, and his colleagues examined the impact of CEO tenure on both employees and customers across 365 U.S. companies from 2000 to 2010.
Their findings show that a long CEO tenure strengthens the firm-employee relationship, but weakens the firm-customer relationship.
“As CEOs accumulate knowledge and become entrenched, they rely more on their internal networks — employees — for information, growing less attuned to market conditions and customers,” Luo said in a press release announcing the study. “And because these longer-tenured CEOs have more invested in the firm, they favor avoiding losses over pursuing gains. Their attachment to the status quo makes them less responsive to vacillating consumer preferences.”
No company can survive without customers, so losing sight of their needs jeopardizes its success. But Luo warns that his findings are not a mandate for companies to turn over their leadership every five years.
“We wish we had a secret formula, but it would be context dependent,” Luo said in a phone interview. “Any firm that wants to have 20- or 10-year tenures really has to go back to their own culture and history and the industry comparisons.”