CEO TENURE: HOW TO KNOW WHEN TO GO
THE SHOCK RESIGNATION OF NEW ZEALAND’S PRIME MINISTER AFTER EIGHT YEARS LEADING THE COUNTRY HAD THE NATION AGOG IN MID-DECEMBER LAST YEAR. BUT IT SEEMS JOHN KEY’S TIMING FOLLOWS AT LEAST THE THEORY AROUND CEO TENURE AND WHEN THE TIME IS RIGHT TO HAND THE
T he day after John Key’s shock resignation in December last year the NZ Herald reported that he wanted to rewrite the rule book on leadership departures and do so on his own terms. “In a way no modern day Prime Minister, post war, has left on their own terms. They’ve always been thrown out or had a coup or lost. And I had an opportunity to be the Prime Minister that transitioned to the new team... and we can be living proof of a new way of running the rule book. That is why I did it,” the Herald reported.
And the former PM’s thinking is backed up by at least leadership theory on what the average tenure of the CEO should be.
Hobson Leavy founder Stephen Leavy told Management that while there are certainly no hard and fast rules around the tenure of a CEO the current theory is that it’s not healthy for a CEO to stick around more than perhaps 10 years. The reasoning around this is the need for fresh ideas, whether things are getting stale, and there is also an increase in risk because the board may not be watching the CEO as closely as they may have in the past.
There is also a huge amount of information vested in one individual and the risks around that. Leavy says the longer a CEO is in the role the more power and control they have and potentially that is an increase in risk.
And practice does seem to be starting to follow the theory. He believes the average tenure in New Zealand sees people take on a CEO role for five to 10 years although there are a number of very good long-serving CEOS.
Fortune magazine points to overseas examples Rupert Murdoch who has served as CEO of News Corp for 63 years and Berkshire Hathaway’s Warren Buffett, who has been in office for 59 years. Fortune says in a 2015 article that 20 CEOs included in its CEO analysis have served for 20 years or longer, and an additional 26 have been in office for at least 15 years.
Leavy believes less than three years is too short and leaves no time to achieve much.
“For me personally under that 10 years is best. There are some negatives if you have been there too long.”
Asked whether CEOs know when it’s time to go, Leavy says not always. “It depends on the individual – some do and some really think about that – they want to leave at their peak performance and to leave on a high.” Others, he says, stay too long.
Martin Snedden, most recently CEO at Duco Events spent six years as CEO of New Zealand Cricket, another five years as CEO of Rugby World Cup 2011 and two years as CEO at Tourism Industry Aotearoa.
He says the time to leave is when a CEO realises, if they are looking at themselves honestly, that they have lost the will to be fully engaged with the day to day battle. “If you find yourself getting cynical and lacking in patience, and not prepared to go through what you do daily because you have had a gutsful.”
He thinks this may be reasonably common and does not think people always know the right time frame.
The problem is, he says, people can ignore these signs. It’s their livelihood after all and some CEOs may lack confidence about their skills and experience.
And it does depend on their area of expertise. Once you have spent a bit of time as a CEO, you get a bit pigeon-holed, even in your own mind. You can forget you have a whole lot of skills sets.
But Snedden warns if a CEO has lost his or her energy, it’s obvious to those around them and their card is marked from that point. They may lose their teams' respect because they are not giving 100 percent.
Leavy says of the signs that it’s time to go is partly around timing. “If you are coming near to that 10-year point maybe it’s time to stop and reflect. Do you still feel the same way about the job, do you still feel you’re are achieving things? Like any role, if you are coming into work and it’s not firing you up and it’s hard to get excited, then maybe it’s time to go.”
He says some CEOs do go through such a period but might decide to take a sabbatical and then come back with a second wind and be fired up again.
The former CEO at Air New Zealand and currently CEO at Icebreaker, Rob Fyfe, left Air New Zealand in 2012 after seven and a half years at the helm.
Asked what are the signs a CEO should go, Fyfe turns that around by saying the risk is in destroying value if you do not stay around long enough and leaders need to stay for four to five years.
He says it’s disrupting when you bring new leadership in. The first couple of years is really a consequence of what your predecessor did. In a corporate environment they will have things in place for three, five and 10 year forward paths that you can’t come in and change.
“I found in my tenure it wasn’t until years three, four and five that I started to hit my stride. But too far past year eight and nine the world is evolving around you and you have to start unpicking the thing you have done. It is hard to put things you’ve achieved under the microscope.”
So in general he felt the window was not less than five years, but not more than nine years, as a ball park.
Double digits, he says, can restrain innovation although that said
there are always exceptions to the rule and he sees a few great organisations where the CEOS have been around 15 or 20 years.
As to the tenure of board members, Fyfe believes turnover is also important but with a collection of people on the board, you can manage arrivals and departures more easily. Boards should be constantly evolving to keep pace with the world around them.
So how important is it that a CEO lines up his or her successor?
Leavy says that is the fifirst first thing a board should be asking their CEO and it should be the number one KPI for the CEO: Who are your potential successors within the organisation?
He says boards are becoming more aware, but it is still not being done particularly well.
Hobson Leavy advises boards on succession and while he says it may seem counter intuitive in terms of executive search, good succession planning means a better organisation in the long run which will be recruiting more and CEOs will also be recruiting to find fififififind their successor.
As to the length of tenure his feeling is that compared to other countries countries, CEOs here don’t turn over as often as in some places. Working with international recruiting groups he feels as though CEO tenure in the United States is getting shorter and shorter and some of the literature he sees points to less than three years.
Fyfe explains that after about two years into the role at Air NZ the board came to him saying they were happy with how things were going and wanted to ensure he remained for the foreseeable future.
At that two-year point they had a discussion about how long his tenure might be and agreed from that point it would be four to five years to put the strategy in place.
“We had an agreement in principle that I would make a commitment for five years, assuming that we achieved the goals and delivered on the strategy."
And does that happen often? "Probably not as much as it should," says Fyfe.
In his view, it’s healthy for an organisation to have a change of CEO. Air New Zealand’s current CEO Christopher Luxon was sought out while Fyfe was CEO and brought into the company and Fyfe says they were explicitly looking for someone had who had a different skill set to his. Luxon was bought in so he understood the value platform and to see how he could build another layer on that and bring another dimension to the business.
Where businesses get caught out is in bringing in the same skill set, says Fyfe.
The companies he is involved with now are younger companies and they understand the need to be very agile and to buy into new mindsets.
He is a strong believer that you have to be constantly looking and asking where are the blind spots?
Bill Kirkley, senior lecturer at Massey University’s Management School, says there is little research out around CEO tenure, but prior to the GFC the average tenure of CEOs in the mainly American companies sampled was six to seven years. Europe tends to go the same way although Germany has much longer tenure.
He says CEO tenure in Europe is fairly constrained because they primarily appoint internally.
Kirkley says he feels a CEO may be looking at a use-by date after about five years. Most contractual relationship include a five-year review. He agrees three years is too short and most strategic changes by a CEO only come into force at around two and a half to three years of their tenure.
Kirkley says a CEO offers their best value and the optimum point in their decision making at around that three-year level.
He too points to board tenure, as they too can become stale and invested in the existing paradigm and lose sight of what their competitors are doing.
“You can get too close to see, after years of successful performance. When you sit back and relax that’s when you may need to start getting worried.”