CEO tenure is getting shorter. Maybe that’s a good thing
There’s evidence that corporate chiefs shouldn’t stay in their roles too long
John Flannery spent 25 years working his way into striking distance of the top job at General Electric Co. Then, he spent the next four winning a succession dance-off with four rivals. His prize was a paltry 14 months as chief executive.
GE’s board dumped Mr. Flannery amid missed financial targets and concerns about the pace of change.
Directors, having endured years of meager returns under his predecessor, watched GE shares tumble by half during Mr. Flannery’s brief tenure even as the S&P 500 grew about 18%.
We tend to celebrate long tenure, but there is evidence that boards are becoming less patient, and that’s a good thing. Researchers, studying a decade’s worth of financial and share-price performance of hundreds of large-cap companies, found that the “optimal tenure length” is 4.8 years.
Xueming Luo, a professor at Temple University’s Fox School of Business and one of the authors of a widely cited 2012 study, said CEOs are most effective in the initial years because they are more open to outside opinions and less risk-averse.
“The search for external knowledge tends to end,” he told me this week.
“It eventually becomes a situation where the CEO surrounds themselves with a lot of ‘yes’ people,” Michelle Andrews, a coauthor of Dr. Luo, said. “At a certain point, there are diminishing returns.”
Leaders operating in declining markets and other volatile environments, Dr. Luo said, tend to turn inward faster than if things are going smoothly.
The 4.8-year optimal target is strikingly close to where the current median CEO tenure sits. Research firm Equilar Inc., found it was five years atop American large-cap companies in 2017, one year less than it was in 2013.
Anyone watching corporate headlines in recent months realizes this number is not likely to rebound this year. This past summer delivered a series of abrupt exits, including at Campbell Soup Co., J.C. Penney & Co., Mattel Inc., GameStop Corp. and Xerox Corp. Equilar reports there have been 51 exits through September, already outpacing last year.
“Many of these leaders didn’t survive two years,” Yale School of Management business professor Jeffrey Sonnenfeld said in a recent report on CEO churn.
Mr. Sonnenfeld said in an interview that there is risk in the quick-trigger strategy. He said Ford Motor Co.’s 2017 firing of Mark Fields after three years was premature. Ford’s stock price has suffered since the move and financial results have suffered under Mr. Fields’ successor, Jim Hackett.
A Ford spokesman pointed to recent comments by Chairman Bill Ford saying he is pleased with Mr. Hackett’s progress on turning the company around. Mr. Ford noted there is still work to do.
Bill George, a Harvard Business School professor and former CEO of medical-device maker Medtronic PLC, said Procter & Gamble Co., led by David Taylor, is an example of a company with a strong board that needs to carefully consider the effectiveness of its CEO.
“The thing is just drifting along and falling farther behind their competitors,” Mr. George said. “They’re not in trouble like GE, but they could be.”
P&G investors have lost 8.8% over the past year, including dividends, and management is contending with tough competition, rising costs and its own bureaucracy.
Mr. Taylor, a P&G veteran, has been on the job just shy of three years.
A P&G spokesman said the company has extended leadership in several product areas, cut costs and boosted productivity. “No one at P&G is standing still, and we’re definitely not drifting.”
GE had its own recent legacy of frustration, and Mr. George sees the abrupt end of the Flannery era as a way to create a new management culture for the 126-year industrial legend.
Over the course of GE’s long history, the average tenure for the company’s chief is 14 years. Mr. Flannery’s two predecessors—the disparaged Jeffrey Immelt and the celebrated Jack Welch—lasted 16 and 20 years, respectively.
Mr. George said Mr. Immelt’s long, dispiriting tenure cast a shadow over Mr. Flannery: “I empathize with him because the problems were buried, and it’s taken him this year-to-14 months to try to dig out.”
In a CNBC interview early in his tenure, Mr. Flannery was asked how long GE’s makeover would take. “You tell me,” he said. He then said it would need to be a “multi-year journey.”
By May of this year, he argued at an industry conference that he had a sense of urgency, but he wouldn’t be rushed. “So being deliberate and then moving when things make sense as opposed to moving just because somebody wants us to is just my style.”
New CEO Larry Culp is now on the clock.
Whatever his style, he shouldn’t expect things to slow down.