Contrary to popular belief, chief executives tend to stay too long. They – and their boards – have to plan succession
In the closing years of the last century there was a cult of the CEO as star. CEOs often appeared on magazine covers, and they published books dispensing their unique wisdom to aspirant followers. The collapse of Enron and WorldCom (both of whose leaders were fêted as visionary) put an abrupt end to this hero worship. For all that, the CEO is still seen as central to the success of the corporation, even if the qualities now sought (competence and a distaste for the limelight) are the reverse of what had at one time been thought essential to leadership. But for any chief executive and any employer, there are a couple of central questions. The CEO has to decide when to bow out. And – as this might not happen coincidentally – the board has to decide when and how to appoint a successor. Why should a CEO retire? There are only two answers: for business reasons or for personal reasons. Obviously the ideal situation is when both of these are aligned.
Shorter, but not short enough
Let’s look first at business reasons. It is commonly felt that CEO turnover is out of control, given the shortening trend of CEO tenures. However, most evidence shows that CEOs stay too long, and can end up destroying value in a company. Perhaps the most comprehensive regular study of CEO succession is that conducted by consultants Booz Allen Hamilton. According to this study, returns to shareholders (adjusted by industries and regions) are significantly lower in the second half of CEO tenure regardless of whether the CEO was forced to leave or whether it was a regular transition, where the CEO retired or left for another job.
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