CEO term limits: Double edged sword?

As Zimbabwe strides towards Vision 2030, driven by the mantra “Zimbabwe is open for business”, Government and other stakeholders are looking at strategies and tools that can be used to foster sustainable economic.

ALTHOUGH corporate governance may not be the sole driver for economic development, it is considered as a key element that drives economic growth, efficiency, stability as well as encouraging domestic and foreign direct investment into the economy.

According to the World Bank’s Corporate Governance and Development Report: “It is evident that, although corporate governance may not be the sole driver for sound economic performance, it is a significant contributor, and we have only to see the devastating consequences of poor corporate governance practices to appreciate the importance of corporate governance to economic development and its benefits for jobs and wealth creation.”

There is overwhelming empirical evidence, linking good corporate governance to high economic development outcomes.

Countries with a reputation of maintaining high corporate governance standards and practices in both public and private sectors, have higher chances of attracting both domestic and Foreign Direct Investment (FDI) needed for driving economic growth and development.

CEO tenure caps

debates and public engagements a few years ago, it came out clearly that Zimbabweans wanted the term of the country’s CEO, the President, to be limited.

The Constitution of Zimbabwe, under section 95, provides for a five year term (maximum of two consecutive five year terms) for the Head of State and Government.

In view of that, why not extended this principle to all leadership positions in both the public and private sectors?

Another legal instrument that limits tenure of CEO is the Reserve Bank of Zimbabwe (RBZ) Act 22:15. Section 15 thereof provides for a maximum of two five year terms for the Bank’s Governor.

The Zimbabwe Stock Exchange (ZSE) Listing Rules do not impose any CEO term limits for listed companies.

The Zimbabwe National Code on Corporate Governance (the Zim Code), is silent on CEO term limits.

The Companies Act does not give any term limitation for CEOs in companies registered under it.

Debate

Many Zimbabweans have expressed the view that if the term of the President is limited to two terms, why should the term of leaders in the public and private sectors not be subjected to limitation?

While it is the prerogative of shareholders, through boards, to determine the term of office of a CEO, perhaps it is time that discussion on this matter be brought up to the public forum to enable us to assess whether the term of CEOs should be restricted or not as a best practice.

In favour of CEO term limits

From research, the rationale for limiting the term of CEOs is summarised as follows:

. Long serving CEOs become entrenched and autocratic.

. Need to inject new blood and fresh ideas.

. Provision of opportunity to young talent.

· Long serving CEOs become complacent and less value adding.

· Allows for innovation if others are allowed to come in with new ideas.

· Brings in diversity needed to rejuvenate an organisation.

· Long serving CEOs end up controlling the board (board erosion) compromising its independence and effectiveness (rather than the other way around).

· Long serving CEOs end up using company to enhance own status for personal advantage.

· It improves corporate governance, that is, accountability and transparency.

Against CEO term limits

Some argue that CEOs should stay in office for as long as the shareholders and the boards are happy with their performance.

Long CEO tenure is beneficial in that:

. It allows CEOs to execute and implement consistent, long term business strategies.

. If CEO tenure is reduced, CEOs may focus on short term strategies and gains as opposed to long term ones and this may not be in the best interests of the company.

. Why rock the boat when the CEO is performing and shareholders are realising value for their investment?

. Why release a well performing CEO and deprive a company of skilled management, by offering them to competitors?

. If CEO tenure is reduced, there is likelihood of losing the benefits of experienced CEOs.

. Imposing limits on CEO tenure is tantamount to interference in the internal affairs of organisations which is the prerogative of shareholders and boards.

Corporate failures and scandals

Corporate scandals, failures and corruption which have impacted negatively on investors and stability of national and global economies, have forced regulators to intervene in corporate governance areas that they would not normally interfere in. Zimbabwe is a good example.

The Zimbabwean Banking Amendment Act, 2015, prescribes specific corporate governance practices.

Section 19 (3) of the Act limits terms of directors of banking institutions to 10 continuous years.

Other African central banks, namely Central Bank of Kenya (CBK) have taken the same position adopted by the RBZ

on limiting tenure for bank directors.

CBK Governor, Dr Patrick Njoroge, in 2016 announced that the CBK would: “shortly be issuing a consultation paper for review and comments on proposal to limit tenures for non-executive directors and CEOs of banks”.

At a stakeholders’ consultative forum called by Kenya Deposit Insurance Corporation in July, 2016, CBK Governor added that: “By being there long enough and having become part of that institution, it is difficult for that person to continue providing guidance and vision for that institution”.

The regulatory direction taken by RBZ, which is in line with other central banks, seems to suggest that we may see CEO term limits being imposed by other regulatory bodies such as the Securities and Exchange Commission (SEC) and Zimbabwe Stock Exchange (ZSE).

A renowned global audit firm, Deloitte, has reduced the terms for its CEO and board chair to two four year consecutive terms.

Outlook

What is emerging from the global arena shows that, as company shareholders push for performance, CEO tenure is reducing organically, and they may be no need for regulating it. Additionally, reduction in CEO tenure has been driven by improvements in corporate governance practices, shareholder activism (catalysed by corporate failures and scandals) and regulatory interventions aimed at fostering good corporate governance.

As shareholder activism gains momentum in Zimbabwe and shareholders put more pressure on CEO and board performance, this practice of long CEO tenures will dissipate naturally.

With performance becoming a determinant of CEO tenure, we are likely to see non performing CEOs serving shorter tenures or being dismissed from office before their tenure is up.

Succession planning, if it is properly implemented as a corporate governance tool, will also put pressure on CEOs to step down at some point paving way for others to take over.

Regulatory interventions in this area, is also pushing for shortened CEO tenures.

The Zimbabwean Banking Amendment Act (Chapter 24:20), 2015 shows that regulators have taken interest in imposing term limits on directors and this could soon extend to CEO tenures.

As for now, imposing limits on CEO tenure is a double edged sword.

◆