JOHANNESBURG – CEO TENURE is one of the trickiest issues for governing bodies to tackle. Because of its importance, it’s worth having a proper strategy in place before a crisis arises.
As everybody knows, and research confirms, there is a direct correlation between an organisation's performance and the quality of its chief executive. No surprise, then, that King IV and other governance codes make the appointment of the chief executive a governing body responsibility.
King IV recommends that governing bodies should have a chief executive succession plan in place, that it should be reviewed periodically, and that chief executive performance should be evaluated against agreed performance measures and targets at least annually. Both of these recommended practices clearly indicate that once a chief executive is appointed, governing bodies should be ready and able to replace him or her when it becomes necessary in the organisation's best interests. This approach is in line with King IV’s decisive move away from an “apply or explain” to “apply and explain” regime – a clear attempt to encourage governing bodies to eschew a mechanical box-ticking approach to governance and to focus on how their actions are designed to achieve a stipulated outcome.
Governing bodies have to give serious thought to how they will achieve the goals set for them in King IV as they pertain to the chief executive. The chief executive is accountable to them, and therefore any performance issues relating to the chief executive are ultimately their responsibility.
Luckily, when governing bodies get down to the detail of how they will approach chief executive tenure, there is a growing body of research to help them. It’s perhaps worth stressing that, no matter how alluring, the median figures for “ideal” chief executive tenure should not be enshrined in policies but used as guidelines. Every organisation has unique needs and operates within a certain context. Both needs and context change from time to time.
This caveat is especially relevant to the research on the median or average lengths of chief executive tenure. Interestingly, at least two data sets indicate a five-year term as the most common for chief executives.
However, figures of this nature are only averages and imply a much greater range of actual tenures.
And, as research by Jeffrey Sonnenfield (“CEO exit schedules: A season to stay, a season to go”) points out, some of the longest-serving chief executives have remained successful for decades – among them the legendary Warren Buffett (59 years in the hot seat and still delivering around 22 percent a year). A board blindly following a rule about chief executive tenure would have got rid of Buffett years ago!
One of the most interesting pieces of research, “Long CEO tenure can hurt performance”, by Xueming Luo, Vamsi Kanuri and Michelle Andrews, concludes that there are distinct phases, or seasons, that succeed each other during a chief executive's time in office. The basic finding is that in the early stages of their tenure chief executives are at their most dynamic, rapidly acquiring knowledge and launching initiatives. After a few years have passed, though, the same chief executive is often observed to be less dynamic and more risk-averse. The company's performance follows the same curve.
The researchers link this “seasonal” change in chief executive performance to the way in which chief executives interact with two key stakeholder groups: customers and staff. In the early years, chief executives tend to be outward-focused, seeking information and inspiration from internal and external sources. They build relationships with both customers and staff.
In particular, the close interrogation of customer attitudes and behaviours fuels innovative and successful strategies.
Once success has been achieved, chief executives – like kings or queens before them – tend to turn inward, relying more on their internal sources (the “court”). The status quo becomes more important, and the energy and willingness to risk changing a successful formula to take account of changing customer demands decline. The upside, though, is that employee relations benefit.
While the whole question of chief executive tenure is obviously one that requires the exercise of judgment, there are some clear common-sense guidelines for boards to follow:
Make it a policy to review the chief executive's performance annually, and ensure the review parameters are adjusted according to the organisation’s current needs and life-cycle stage. Ensure this performance review prompts a revisiting of the chief executive’s performance and incentive metrics for the coming year. For example, as a chief executive’s tenure lengthens and the chances of turning inwards increase, incentive plans should be weighted towards consumer and market metrics. Develop and periodically update a comprehensive chief executive succession plan, perhaps with the involvement of the chief executive him- or herself. This will have the effect of habituating the chief executive to the inevitable. Above all, remember it's the outcome that counts, not an arbitrary term length.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and chairperson of the Institute of Directors (IoDSA) respectively. Enquiries: [email protected]. Better Directors. Better Boards. Better Business.
The views expressed here are not necessarily those of Independent Media.