A report released by the Conference Board shows that CEOs are sticking around longer than they should.
The average tenure of a departing S&P 500 company CEO is 9.7 years. It hasn’t been that long since 2002, and a recent study by Temple University suggests that this number could be problematic for companies.
The study measured the performance of CEOs over time and found that the “optimal life span” of a CEO is just 4.8 years.
It concluded that after about five years, chief executives will rely more on their internal network rather than information that comes from outside markets. This tendency to focus inward causes them to become less attune to market conditions and customers, which ultimately hurts the company.
Why do so many CEOs overstay their welcome when it could be jeopardizing their firm?
Charles Wardell, CEO of Witt/Kieffer, explains the difficulty of the transition process: “The biggest issue is the uncertainty it creates — the uncertainty of what the new CEO will do.”
Change is a sensitive subject for everyone, especially when it comes to such an essential role within a company.
According to Wardell, there are three main reasons a CEO would step down or be asked to leave.
1. Burn out or loss of enthusiasm for the job.
“When CEOs begin to realise that their skills aren’t matching up, or their enthusiasm is waning, or they’re tired of the constant responsibility,” explains Wardell, “they are going to the board and saying, ‘I’m running out of juice here. Lets think about replacing me over the next year or so.'”
In this scenario, strategic succession planning can make for a smooth transition.
2. External changes in the market.
“Oftentimes the market dictates, causing the business proposition to change so radically that the skills of the CEO don’t mesh up with the needs of the firm,” says Wardell.
A company could have a strategic plan in place, but this is ultimately an external factor out of the hands of the CEO and the company, which can force a more abrupt transition.
3. The board decides enough is enough.
Pushing a CEO out for whatever reason — age, competency, or vulnerability — can cause turbulence and tension within a company, making for a less than ideal transition.
A smooth transition at the top can never be guaranteed. This makes the change in leadership that much more scary, causing CEOs to stay put longer than they should.
So what can companies do?
“We’re not saying, ‘Fire your CEOs after 4.8 years,'” explained co-lead researcher of the Temple University study, Michelle Andrews. “But if company boards restructure CEO packages to cater to consumers more, you may find yourself with better results. After all, you’re only a firm if you have customers. Without customers, no firm can prosper.”
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