Three Longs & Three Shorts

New Thinking Emerges on Optimal Tenure for a CEO

Author: Chip Cutter
Source: The Wall Street Journal (The Wall Street Journal ( / ) )

At Marcellus, whilst we look for companies with institutionalised culture, systems and processes thereby reducing the reliance on a few key individuals, we do acknowledge the contribution of iconic CEOs towards building such an institution. Indeed, CEOs who have served longer tenures have had a lasting impact on their businesses. However, the rapidly changing technological environment combined with natural human tendencies of complacency creeping in mean that sometimes a churn at the top can also be healthy for the long term sustainability of the firm. Indeed, a recent study featured in the Harvard Business Review shows that 10-15 years is a sweet spot of a tenure for a successful CEO stint.
“New research from Spencer Stuart suggests that when top executives stay for more than a decade, they often deliver some of their best years of performance. The executive-search firm analyzed the annual financial results of about 750 S&P 500 CEOs during their tenures and interviewed dozens of leaders in a report published in Harvard Business Review late last year. It showed that CEOs had some of their best value-creating periods in years 11 to 15 on the job.
In these “golden years” of CEO tenure, as the report describes them, executives benefit from strong institutional knowledge and the experience of guiding a company through multiple crises. “In many cases, longer is in fact better,” said Mr. Citrin, a lead author of the report, who has presented its findings to many corporate board members.
How long a corporate chief lasts in the corner office can depend on multiple factors, including the CEO’s financial stake in a company. Founders may be able to lead a company for extended periods due to large ownership positions or special voting powers that cement their position. Such powers are common among some of today’s best-known technology companies. Facebook Inc., Snap Inc. and Lyft Inc. all have supervoting structures.
… Often, results matter above all else, corporate-governance experts said. “If you don’t have outstanding performance, you don’t survive, period,” said Bill George, who was CEO of medical-device company Medtronic PLC for 10 years and is currently a senior fellow at Harvard Business School. “No one is irreplaceable.”
Mr. George said he considers a decade to be the magic period for a CEO: long enough to make transformative change at a company without risking complacency. After such a period, he said a company benefits from a leader who can bring a new perspective. “High-tech, fast-moving companies in this day and age need a new CEO every 10 years,” he said, adding that many founders overstay their usefulness.”