What’s the optimal tenure for a CEO?
In a previous article on average tenure of CEOs in Africa, AAG analyzed a sample of companies operating in Africa and found that CEOs transitioned after an average of seven years. Is seven years the ideal amount of time for the CEO currently leading your particular organization? It depends.
Defining the optimal tenure for a given CEO at a given company requires considering the implications from the perspective of the CEO as well as the perspective of the board.
The length of CEO tenure and circumstances triggering a transition result from the interplay of an individual CEO’s level of performance and commitment.
While there may be valid concerns about the potentially negative relationship between tenure and performance, as suggested by a study done at the Fox School of Business, there is no inherent reason why a CEO who is committed to guiding the success of a particular company cannot adapt his or her behavior to ensure continued relevance and effectiveness in leading the organization. On the other hand, a CEO who has performed well in a particular company but has waned in commitment may be persuaded to stay if the board can create the right incentives to make the position remain attractive, provided these measures do not compromise the company’s potential for continued growth and profitability.
What does this mean for boards?
For boards seeking to retain high-performing CEOs, understanding the reasons why CEOs typically resign can help inform strategies to keep strong CEOs engaged. Additionally, board members who have a keen understanding of the CEO mindset and average CEO tenure in their market or industry can better prepare for CEO succession.
Performance Management and Incentives
An overwhelming majority of executives cite “poor company values or culture” and “dissatisfaction with senior management” as the primary reasons they might contemplate leaving a job or industry, according to the most recent Executive Mobility Report published by BlueSteps, a service supported by the Association of Executive Search and Leadership Consultants. Boards should pay close attention to CEO satisfaction and commitment as well as monitoring performance. The BlueSteps report also found that increased responsibilities, a more entrepreneurial role, and increased compensation and benefits are among the key factors considered by senior executives when exploring new opportunities. It is prudent for boards to consider these same factors when periodically reviewing the CEO role and incentive scheme.
Succession Planning and Leadership Development
When dealing with under-performing CEOs, boards should consider the trade-off between investing in supporting the incumbent CEO to improve his or her performance and proactively grooming a successor. If the CEO’s level of commitment and fit with the culture of the organization is high, and the gap in performance is marginal, efforts to coach, mentor, and develop the individual might bode well for extending the CEO tenure and ensuring the long-term stability of the organization.
Organizations don’t want under-performing and under-committed CEOs. When a CEO is consistently performing well and personally invested in successfully leading the organization, the board should pave the way for a long-tenured CEO. However, when the CEO’s level of performance is strong but the level of commitment is waning, or conversely, when the CEO is highly committed but failing to perform, the board should consider taking action to make an executive change. In those instances, both the CEO and the board should make efforts to ensure that an appropriate transition is thoughtfully considered and well managed to minimize disruption to the broader organization.