How many CEOs overstay their welcome, whether in the public or private sector? For some, even when their time is up, they hang on to the bitter end, and land up damaging or even destroying the organisation. For others, they might be a ‘darling CEO’, but if they fail to take heed of significant warning signs, there are dire consequences.
How do we determine when a CEO’s time is up? What is the optimal period to be a CEO? These are essential questions that have been researched and need to be considered in the South African context.
Looking at how or why CEOs can hurt the performance of the business, a feature in the March 2013 issue of the Harvard Business Review, titled Long CEO Tenure Can Hurt Performance by Xueming Luo, Vamsi K. Kanuri and Michelle Andrews, makes several key points that are as relevant today as they were five years ago:
It’s a familiar cycle: A CEO takes office, begins gaining knowledge and experience, and is soon launching initiatives that boost the bottom line. Fast-forward a decade, and the same executive is risk-averse and slow to adapt to change—and the company’s performance is on the decline. The pattern is so common that many refer to the “seasons” of a CEO’s tenure, analogous to the seasons of the year.
They make the critical point that when CEOs are new on the job they thoroughly do their homework in terms of building relationships with both the internal (staff) and external stakeholders (customers but also the business and socio-political environment). However, after a few years, what happens is they become comfortable in their relationships with their internal people to whom they then entrust the external responsibility to a large degree. This typically results in the CEO spending less time engaging with the market and their customers, and losing direct touch with what is needed for the business to grow, develop and adapt. The authors put it this way:
As CEOs accumulate knowledge and become entrenched, they rely more on their internal networks for information, growing less attuned to market conditions. And, because they 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.
To overcome this, they advocate that ‘boards should be watchful for changes in the firm-customer relationship’ and ‘should structure incentive plans to draw heavily on consumer and market metrics in the late stages of their top executives’ terms. This will motivate CEOs to maintain strong customer relationships and to continue gathering vital market information firsthand’.
Another article from 2013 titled Time to Go? How Long Is Too Long for CEO Tenure? by Chad Brooks, a senior writer on Business News Daily, cites a study of 365 US companies between 2000 and 2010, which found that the average CEO holds office for 7.6 years, but suggests that the optimal tenure length is 4.8 years. The point is also made that this doesn’t mean a time limit must be literally applied (some CEOs like Warren Buffett seem to get better with age), but it cautions all boards to put measures in place to ensure that CEOs remain both internally and externally focused. The latter is particularly relevant in ensuring that they do not behave in a way that is out of touch with reality, unethical or unacceptable.
CEOs who believe they are infallible also open the doors to dire consequences. Travis Kalanick, former CEO of Uber is a case in point; he failed to heed key warning signs that the company was seen to be inter alia greedy and non-responsive to allegations of sexual harassment.
Former Imperial Holdings’ CEO, Mark Lamberti, had to fall on his own sword after the Court ruled that he had impaired the dignity of Adila Chowan, when he referred to her as female employment equity candidate. This case raises the important question as to the real commitment South African CEOs place on transformation.
Holding CEOs to account is of course easier said than done, especially when they have a track record of turning companies around. Some though, know when their time is up. The oft-cited example is Sir Michael Edwardes who turned around British Leyland when it faced collapse in the late 1970s, but was not necessarily the person you want to lead the company over time. He recognised his own ability as a short-term commander whereas many CEOs, once in power, tend to outstay their time.
A key reason is the power they have, which is interesting from a psychological dimension. If we look at the CEOs of countries – Presidents in Africa, for example – we repeatedly see the President for Life syndrome playing itself out. Power is addictive; people do not want to let go.
There are, of course, also advantages associated with a longer-term CEO if the person is able to maintain the required internal and external focus over time, and to put the company or country before themself. The advantage is described in an article titled Power and Reduced Temporal Discounting by Priyanka D. Joshi and Nathanael J. Fast of the Department of Management and Organization, Marshall School of Business, University of Southern California. They write:
Would you rather receive $100 today or $125 a year from now? Although a 25% increase is an excellent 1-year return on investment, the average decision maker would choose the smaller immediate gain rather than the larger future gain. This tendency to discount the value of future gains is known as temporal discounting (Frederick, Loewenstein, & O’Donoghue, 2002; Kirby & Marakovic, 1995).
The average decision-maker chooses the smaller immediate gain, because, unlike the CEO, they are not in a position of power. To demonstrate this, Joshi and Fast described an experiment using role-play manipulation, where one group was assigned a high-power position of Team Manager and the other a low-power position of Team Worker. They found the people assigned the higher-power position were prepared to delay the reward – wait for the $125 – whereas the low-power people chose the $100.
Willingness to delay gratification is directly related to your position of power. As a CEO you are prepared to wait things out because you can identify the bigger picture, you are connected to your future self. It’s an important management lesson, where team members need to feel a sense of power and responsibility in order to behave in the longer-term interest of the business or organisation. At the same time, the capacity to accumulate more down the line also becomes a potential danger, as we have seen in many cases where CEOs or people in power accumulate more than they are entitled to.
Another risk when people feel powerful is the stereotype of the Wall Street banker syndrome, where, as Joshi and Fast explain, there has been a tendency to take on too much risk for future gain and to make risky, loss-producing decisions. Therefore power holders do not always make the best or the safest decisions.
As you can see, this is the conundrum of human nature and the human psyche. When we have little or no power we tend to make short-term choices because we do not know what will happen to us in the long-term. However, give us a lot of power and the risk is that we will want to stay in power for the long-term and enrich ourselves along the way.
The answer as with everything, is to ensure there is balance. If you give the CEO too much power it’s a recipe for disaster, too little power and they won’t see the bigger picture. Neither is desirable. The board has a fine balance to navigate and that is why their role is fundamental in holding CEOs to account. Get that right and hopefully the tenure will be the outcome that everybody deserves.
This article appeared in Leadership, Edition 393, June 2018. It is reproduced with their permission.