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Boards should develop formal policy regarding CEO tenure: IoDSA

11 June 2014   (0 Comments)
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Many CEOs are staying in the job for too long, risking their legacies and putting their companies at risk. It’s a problem that’s particularly evident in family businesses, and businesses where a charismatic founder is the CEO.

"This is a tricky question for boards to get right,” says Ansie Ramalho, CEO of the Institute of Directors in South Africa (IoDSA). "On the one hand, the CEO remaining in office for an extended period can result in strong relations between management and employees and also continuity in the execution of strategy. However, as research is showing this can come at the expense of a loss of focus on industry and market trends, and weakened relationships with customers and business partners.”

Ramalho cautions that there is no easy formula that boards can use—they have to strike a balance between the two. She notes that some proactive boards are already getting newly appointed CEOs to commit to stepping down when the board votes for them to do so.

"Boards would probably be well advised to develop a formal policy relating to CEO tenure and what indicators should be used to determine when it should be terminated to protect the company and the CEO’s own legacy. In this regard, leaders should actually be grateful for a way of determining more objectively when it’s time to move on—many a career has been blighted by staying on too long in one place,” says Ramalho.

In terms of King III, Ramalho points out, makes the appointment of CEOs, including succession planning (Principle 2.17.5), board responsibilities.

Ramalho’s comments are made in the context of recent research published in the Strategic Management Journal,[1] which links the length of CEO tenure with the performance of the companies they run. The research confirms what most boards already know—the company’s performance is directly correlated to the CEO’s abilities. More controversially, perhaps, the research demonstrates that the length of the CEO’s tenure is also something that needs to be taken into account.

Conducted by researchers from Temple University and the University of Missouri, the study was empirical, and examined 365 US companies between 2000 and 2010. The primary focus was to examine how the length of CEO tenure affected both firm-employee and firm-customer relationships.

The researchers conclude that long tenures by CEOs can help to build solid relationships between the company and its employees. Given the well-demonstrated link between employee satisfaction and engagement with company performance, this finding supports continuity within the CEO position.

However, the researchers also found a negative correlation between a CEO’s tenure and relations between the company and its customers. This is attributed to the fact that new CEOs tend to be externally focused with a high level of interest in customer feedback and market intelligence. Over time, however, they tend to turn inwards, relying more and more on internal sources of information and tried-and-trusted paradigms. The research found that the optimal term for CEOs in respect of firm-customer relations is 4.8 years.

This turning inward also helps to explain the strong company-employee relationships that a long-serving CEO can help to foster but it also has to be recognised that it can contribute to shutting the company off from the perspectives that new talent and outside relationships could bring.

"One challenge is that South African boards are often constrained by the dearth of high-level leadership skills. Choosing the right CEO has always been one of the board’s most important functions—now it seems like knowing when to get rid of him or her could be equally important,” concludes Ramalho.

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