Boards should develop formal policy regarding CEO tenure: IoDSA
Wednesday, 11 June 2014
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,
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.
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.