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Under normal circumstances, would it be best practice to limit a CEO’s tenure to 3-4 years?

I’ve had a fair bit of experience when it comes to working with CEOs, changing CEOs and even being a CEO. Recently I stepped back from an “interim” CEO role that lasted longer than I’d originally intended and, although the transition has been relatively smooth, the process led me to reflect on the optimal tenure for a CEO.

Every case is different, but on balance, I believe that company boards and CEOs should view the CEO role as a time-limited appointment. I’ve seen several cases where an entrenched CEO becomes a damaging influence on a company and I’ve managed cases where a positive CEO succession process has yielded very good results for all concerned.

The role of CEO is a challenging one. Beyond having ultimate P&L ownership and responsibility to the board and shareholders for the company’s progress and performance, it is usually the case that regardless of what happens within the organisation, the buck stops with the CEO. There are all sorts of things that can go wrong on your watch that are basically out of your control, but for which you are technically responsible. If you then consider that there are always outstanding problems to resolve, always people with issues, always something that is broken and needs fixing, the challenge is daunting. The idea of being CEO might feel like some sort of prize to aim for, but regardless of company size, the job requires an always-on mentality. The flexibility that comes with being in charge is tempered by the constant demand to stay on top of everything. And there is often no one to talk to: every conversation turns into an exercise in defending this policy, that decision, those hires, a request for a pay rise…

Given the nature and demands of the job, some might thing the job would only appeal to a psychopath. There is something in that. A recent study revealed that, indeed, around 1 in 5 CEOs are psychopaths. According to the article, this is the same proportion found amongst the general prison population. Psychopathic tendencies include:

  • Exploitation or manipulation of others (management!)
  • A lack of concern, regret or remorse about other people’s distress (ability to sleep at night!)
  • Display of disregard for social norms (innovation!)
  • Inability to control anger (command respect!)

My guess is that the job appeals to some candidates with existing psychopathic tendencies, but probably ends up making psychopaths of others.

Typical CEO tenure is difficult to compile for non-public companies, but if we take public companies as a guideline, a decade ago the typical tenure of a CEO in one of America’s top 500 companies was five years. Research suggests that this has risen to around six years.

My feeling is that private companies tend to have weaker boards, lower general accountability and for those that either escape an early demise or fail to attract an early buyer, there is much more of a tendency for a founder and/or CEO to run things for an extended period of time.

Thinking back over a couple of cases:

  • In one project the CEO wielded power to an extent that should have alarmed the board. When I joined the board and was added to the remuneration committee, I asked the CFO to provide an outline of CEO costs/expenses and the CFO was visibly shaken at the prospect of having to divulge the detail. All roads led to the CEO who was working hard to maintain the illusion that everything was fine when, in fact, the company’s legacy business was faltering and the big up-side opportunity wasn’t materializing as planned. The board reacted negatively to the idea of a CEO change. This was partly due to fear of the existing CEO, partly due to a dislike of hard work and, more legitimately, a fear that the dominance of the CEO left a power vacuum that would be hard to fill. Once we initiated conversations with potential replacements, however, the need to make a change was obvious. The departing CEO reacted badly and did not co-operate. On his departure, we saw clearly that the company was very close to failure and was being propped up by some debt that had not been declared, so the incoming CEO had the dirty job of sorting out some pretty big messes. The company is now stable and trading its way forward.
  • In a second, contrasting case, I had a close working relationship with the CEO. He was the sort to do things properly, even to the point of being a tad officious when a bit of pragmatism might make sense. He had done a great job of helping the company through a difficult patch and he was good at watching the pennies. All of that was great, but on the down-side, he struggled when it came to plotting a strategy for driving company growth in this particular sector and it became clear that to take the company forward we’d need a new CEO. He had been in place for 4 years. Given that he’d done a great job, the outgoing CEO needed to be treated with maximum respect and he needed to be given an exit package that would recognize his contribution and give him enough runway to find his next role. Some of these discussions were not easy, but we reached an amicable agreement, he stepped out, we ran a search process and found a superb candidate who came in and was able to hit the ground running because everything was in such good shape.

 

And, in my own recent case?

I stepped in from the board at a point where an existing CEO wasn’t working. That transition was smooth, but the company was on course for failure, needed a viable strategy and needed funding. An obvious conclusion at that point would have been to simply terminate the project and recognize the loss. However, after a round of funding and a couple of strategy tweaks, the company reached break-even and was then nicely profitable, but still required much work to sustain growth.

In this particular case, I was of the opinion that we needed to cultivate a new CEO internally rather than run a process to find someone and then throw them the keys. There were three specific points in time where I believed that we had ideal candidates, but in all three cases things didn’t quite work and I found myself engaged in the role for far longer than I had originally planned. Some of it was fun and I learned a huge amount about consumer behaviour, marketing and gamification. However, over time I became the authority: I knew everything we’d done, I knew what had worked and what hadn’t worked. It becomes easy for people (staff, board, investors) to simply defer to a CEO’s opinion, and it is easy to slide into an authoritative style of management when it is clear what needs to be done and clear that getting anything done requires a lot of pushing. When you get to the stage where you push, everyone says “yes sir, no problem sir” and then they do not deliver, there is a problem. Fortunately, in my case, we recently brought in a likely candidate who had established his credibility and was willing to commit. The transition was smooth, but I’d be open to the argument that in an ideal world, it would have been better for me and for the company to have made the transition earlier.

My conclusion is that it is a good idea to establish an understanding that a CEO’s tour of duty will typically be in the 3-4 year range. This forces the board to think about succession and discourages the scenario where one personality becomes too much of a dominant force within the company.

But… Here are some “buts” raised by colleagues when I’ve discussed the idea with them:

… what about the case where a CEO is doing a great job and wants to stay?

  • I don’t think there should be a dogmatic focus on replacing a CEO every 3-4 years regardless of performance, but I suspect that the discipline of forcing the board to consider the issue periodically is beneficial. Likewise, ensuring the CEO doesn’t view the role as a lifelong right or some kind of sinecure might engender a healthier attitude towards the job and towards cultivating talent.

… what about the visionary founder scenario: aren’t most “unicorn” companies those that continue to be led by the original founder?

  • This is a trickier question. While a passionate founder can make a massive difference to a business, for every Steve Jobs there are hundreds more who lack the talent, skills and patience to build a successful organisation. As with the point above, I’d argue that establishing an understanding that the CEO role is something that will be reviewed at regular intervals creates an overall healthier view on both sides. And would Jobs have been Jobs if he hadn’t been ousted?

… aren’t there too many cases of VC investors messing around with management and destroying companies?

  • I’m sure there are cases like this, but my own experience is that if things are working to any extent, VC investors tend to be scared of making changes and existing management end up holding all the cards. I’m not talking about a VC policy for dealing with investee companies. I’m talking about general corporate governance and the responsibilities of a board.

I’m sure there are plenty more “buts” out there and I’m happy to hear them.

 

A few recommendations:

  • A company needs a board. A proper board, not a few friends and not a couple of investors who come along to meetings in order to use the company’s wifi to check email.
  • The board should always include someone who could potentially step in as CEO, at least on an interim basis while a search is undertaken. That means they need to know what the business is doing and that means that they probably don’t sit in board meetings checking email.
  • CEO succession should be a regular topic of discussion amongst the non-exec board members and including the current CEO when relevant.
  • CEO contracts should imply a term of engagement.
  • The company’s option scheme can be set up to accommodate this and I’ll cover it in a future post.