Is Shorter CEO Tenure a Good Thing?

December 12, 2013 Vince Molinaro

 

Just 17 months after Thorsten Heins took over as CEO at BlackBerry Ltd., he was out the door.

Heins had been given an enormous task: help the smartphone maker reverse years of poor performance and regain market share lost to rivals Apple and Google. As CEO, Heins tried to put together a group of investors to take BlackBerry private. When that deal fell through, so did Heins’ tenure.

Heins is only the latest in what seems like a growing list of high-profile CEOs making quick, sometimes unexpected departures. Although there is no hard-and-fast rule for how long a chief executive needs to hang around, CEO tenure certainly seems to be getting shorter all the time.

According to the Challenger, Gray & Christmas Inc. survey of CEO departures, more than 1,000 chief executives have left their organizations in the first ten months of 2013, a five per cent increase over the same period a year earlier.

As departures increase, tenure has been decreasing. The average CEO tenure is now believed to be about eight years. However, for the chief executives of the largest companies in the United States, Forbes magazine estimates CEO tenure to be less than five years.

Why are CEOs moving in and out of their posts with increasing frequency?

The reasons vary. Boards of directors appear to have much less patience now than before the 2008 recession. Many boards are still operating in crisis mode, and thus have increasingly less tolerance for poor or even mediocre performance.

The same holds true for misconduct. In the wake of numerous corporate scandals, boards have become less tolerant of any kind of bad behavior, from financial irregularities to sexual harassment. A good many CEOs in the last five years have fallen on this sword.

It also seems a lot easier for a CEO to get in trouble than ever before. Thanks to the Internet and social media, high-profile senior executives live under constant scrutiny. Every loud argument with a colleague, every poorly-worded memo, every ambiguous comment is now destined to find its way into the public domain. And each time that happens, a CEO somewhere self-destructs.

Sometimes, however, CEOs hit the ejector button for their own reasons, and not because they were being pushed by boards or hounded by the media.

Many of the best-and-brightest CEOs are willing to move on a moment’s notice. At some level, this is only a reflection of market realities: true executive talent is rare and highly sought-after. As a result, top executives are always being courted, and that can encourage them to leap frog from organization to organization.

Once they leave, it can have a profound impact both on executives and their former organizations. And once a CEO has taken the first leap, he or she will be much more likely to consider doing it again. The unspoken loyalty contract that used to exist between organizations and their senior-most executives just isn’t the barrier to mobility that it once was.

There are many different kinds of short term CEOs.

Some are thought to be long-term hires and turn out to have very short tenures. Some are deliberately brought in for the short term. They include:

The all-star free agent. Calvin McDonald was a star at Loblaw before taking on Sears Canada. Melissa Mayer was employee number 20 at Google, and the first female engineer hired by the Internet giant. The companies that recruited these CEOs didn’t just want a capable executive; they wanted a rock star who would put a charge into both employees and investors.

The downside is that free-agent CEOs, like free-agent professional athletes, are always keeping an ear out for the next great offer. They are more inclined to jump ship if things aren’t working out. Or, if another organization is able to dangle a bigger, shinier penny.

The turnaround specialist. A variation of the free-agent class, the turnaround CEO is specifically brought in to fix or save a struggling company, such as when Best Buy Co. hired Hubert Joly away from Carlson, a multinational hospitality corporation.

Joly is still with Best Buy, and the results have been spectacular. The company’s financial performance is stronger and stock prices have tripled. However, like other turnaround specialists, Joly’s tenure will likely depend very much on his ability to keep the arrow pointed ever upward.

The lame duck. Robert Willumstad had been chairman of the board of American International Group (AIG) for nearly three years when he agreed to become CEO in mid-2008. As history now shows, Willumstad inherited a deeply-troubled company that would eventually require a massive government bailout. Under Willumstad’s watch–a mere three months–AIG share price dropped 97 per cent. His last act as CEO was to turn down the company’s $22-million severance offer.

There is no doubt Willumstad knew what he was in for when he agreed to take the AIG helm, and that his tenure would likely be short. And sometimes, that’s exactly what a company needs: a steady hand to step into a job that no one would take for the long term.

The executioner. Ed Whitacre, the former CEO of AT&T, came out of retirement to head up General Motors in early 2009. Whitacre had a specific mission: streamline and re-organize GM in the wake of the recession and a government bailout. Whitacre responded by discontinuing several iconic GM brands, earning him the nickname “the GM Reaper.” Whitacre would stay with GM for just nine months, and is acknowledged now for making the tough decisions that helped set up GM for renewed stability.

There are times when organizations need to make tough decisions, and bring in a short-term CEO to deliver all the bad news. A CEO that has no emotional baggage may often best serve organizations involved in significant downsizing or restructuring. The term is kept deliberately short so that after all of the tough decisions are made, a new CEO–the good cop to the executioner’s bad cop–can be brought in for the longer term to restore confidence and engagement.

With so many factors contributing to shorter CEO tenures, we need to ask: on the whole, is this a positive or a negative trend?

Shorter terms do serve a purpose for some companies. It makes some sense to keep the tenure of an executioner CEO short. This is a leader who is there to deliver painful change, and then ride off into the sunset. The same holds true for lame ducks; sometimes it doesn’t make sense to retain a CEO that is only brought in to ride out a particularly difficult period.

However, shorter CEO terms can also erode stability and long-term planning. Employees and investors often react negatively if there is a revolving door in the CEO’s office. This will make it very difficult to retain and recruit top talent. Investors, meanwhile, often use executive instability as an excuse to abandon stocks.

The reality is that today’s corporate world appears to be making it easier for CEOs to leave. Negotiated exit packages put so much money on the back-end of a CEO engagement that it may be too much for some executives to resist.

While different kinds of CEOs necessitate different tenures, the volatility that comes from recruiting, and then losing, top executive talent can be disruptive, even destructive, to a company’s long-term prospects.

About the Author

Vince Molinaro

Vince Molinaro is the Global Managing Director of Strategic Solutions at Lee Hecht Harrison. He is also the author of The Leadership Contract – a New York Times and USA Today bestseller. Vince has spent more than 20 years as an adviser to boards and senior executives looking to improve leadership in their organizations.

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