Chief executive officer's tenure: How long is too long at the top?

A young man and an older man illustrate the power of mentorship. [Getty Images]

Many companies in Kenya have had their hands full this year manoeuvring through a relatively low customer and consumer demand for their products and services even as business operational costs rise. This is amidst a disruptive, stiff and ever evolving competitive landscape. According to consultants Challenger, Gray & Christmas, January-through-May 2023, has seen 789 exits from the corner office in US companies, an 18 per cent increase in the same period, year on year.

Whilst not giving specific reasons for the high turnover, the consultant alludes to the fact that organisations in the United States are dealing with some uncertainty surrounding recession concerns, disruptive technology, and high interest rates. Additionally, the workplace has 'fundamentally changed' over the past three years, and CEOs like anyone else, experience burnout.

Russell Reynolds, another human talent consultant, cites economic uncertainties and a rapid rate of change in the business environment, persuading enterprises to aspire for new approaches, new innovations, and new strategic approaches to compete more rigorously. Shifting customer and consumer demands have also played a key role in the CEO's tenure. The declining tenure rates continue to reflect the challenges CEOs currently face, and the ability for them to navigate these changes and drive sustainable growth, remains vital in shaping today's competitive business environment.

CEO tenure (the time the person spends in the position) research is rooted in a long tradition of CEO research in general, resting on the basic premise that CEOs matter in organisations. No single group of individuals has received more focus than the chief executive officer (CEO). Much of this attention must surely come from the fact these individuals are perceived as the key decision-makers in corporations that account for most of the economic activity in modern economies.

According to Zangrillo and Keil, authors of 'The Next CEO: Board and CEO Perspectives for Successful CEO Succession', the current average tenure of CEOs and other senior positions ranges from just below four years to about nine years. The CEO's long tenure delivers some clear advantages to an organisation. Over time, and through the building of relational assets, the long tenure CEO develops strong experience on how to lead the organisation and how to build success in a given sector. Additionally, the CEO's experience may allow a more efficient and effective management approach, even with a changing operating environment. In general terms, large and multi-faceted organisations have been known to benefit from long CEO tenures.

Long CEOs tenures do however carry some specific risk for both the organisation and the individual, particularly in rapid changing environments and when the CEO is needed to reinvent themselves to adjust to these changes, and when adjusting may call for dissecting and reinventing what the same leader may have created earlier. Long tenure top leadership may also freeze career paths. When leadership tenure is deemed as rather long with the leadership team seemingly having "grown roots" in the boardroom, some core human talent in waiting, may get the signal that career progression is impossible since key leadership spots maybe all occupied.

Moreover, success for long-term CEO tenure breeds complacency too, where credit is taken for success and failure is blamed to the operating environment. Long CEOs tenures have also been known to create organisational compliance risks as existing business relationships acquire less than objective assessments over time. Because CEOs also have a 'sell by date', according to a former Sulzer CEO, there is need for new senior leadership to be systematically brought up to the top positions through internal promotions or through external hires.

Empirical research does show that when a successor takes over after a long-tenured CEO, operating performance and stock returns are significantly lower, restructuring costs are higher, and firm recovery is slower. English Premier League fans will remember that Manchester United and Arsenal football clubs have suffered immeasurably post their managers' long tenures (Alex Ferguson, 26 years; Arsene Wenger, 22 years, respectively). Having highlighted the above and because every company and industry is different, opting to keep an individual CEO for varied lengths of time, is the prerogative of the enterprise's leadership, its board and shareholders.

Whilst CEO transitions is a delicate dance to get right, industry experts agree that it is never too soon to start planning for the organisation's next CEO. And boards have a responsibility to think and act as such. It is worthy of note to highlight that an empirical relationship has been established between different quality levels of an enterprise's corporate governance and the organisation's CEO's tenure.

The business and operating environmental complexity and dynamism that has emerged over the last two to three years is here to stay, intensifying the importance of getting the CEO's succession right and shifting the way organisations think about what makes an effective leader.

Regardless of whichever region in the world, the current global economic distress and turbulent markets are affecting the corporate governance landscape. Everything from the war in Ukraine, the tensions in the Middle East, post Covid-19 pandemic crisis supply chains challenges, and rising inflation have put strain and stress on enterprises and their leadership. Experts expect an even greater and deeper emphasis on board oversight of CEO performance and succession planning.

Fields and O'Kelley of Russell Reynolds Associates however opine that developing the next generation of leaders, selecting the right person, and setting up that person for success is far from a given. To underscore the importance of organisational succession planning, the Daily Show, a top-rated iconic United States comedy TV series, has been struggling to find a replacement, more than 10 months on, after the departure of Trevor Noah.