Viewed in Fortune
Determining the right time for a CEO to step down is a complex challenge for corporate America. While examples like Warren Buffett’s 54-year tenure at Berkshire Hathaway show long-term success, others like Fred Kindle’s brief but impactful three-year stint at ABB illustrate the opposite.
On average, CEOs in the S&P 500 serve about 9.2 years, but this statistic can be misleading.
Long-term diminishing return
Research from several universities, including Boston University and the University of St. Gallen, indicates that a company’s value typically peaks around a CEO’s 10th year and starts to decline after the 14th year.
This suggests that long-term leadership can lead to diminishing returns.
Five stages
A new leadership framework, detailed in “The Life Cycle of a CEO” by Spencer Stuart’s Claudius Hildebrand and Robert Stark, outlines five stages of a CEO’s tenure:
- Year 1 : A honeymoon phase marked by enthusiasm and often a stock price increase.
- Years 2-3: Initial challenges and reality checks as enthusiasm fades.
- Years 3-5: CEOs reinvent themselves, gaining confidence and better handling board and investor expectations.
- Years 6-10: The complacency trap, where CEOs may either defend the status quo or shake things up to avoid stagnation.
- Years 11+: CEOs focus on legacy, but board vigilance is crucial as performance tends to decline after year 14.
Vigilance, courage and judgment
Boards must be alert to signs of CEO rigidity and manage succession proactively.
The emotional and personal challenges of stepping down often result in long-tenured CEOs overstaying, causing potential successors to leave and leading to poorer performance by their eventual replacements.
Ultimately, the decision to replace a CEO requires nuanced judgment rather than reliance on tenure averages alone.
