CEOs can hurt their companies if they stay too long. When’s the right time to say goodbye?

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CEOs can hurt their companies if they stay too long. When’s the right time to say goodbye?

By Geoff Colvin  | Fortune Magazine | Jun-July 2024 Issue

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How can a company know when it’s time for a CEO to go? Anecdotes fall all over the map. Warren Buffett, the longest-tenured CEO in the Fortune 500, has been running Berkshire Hathaway for 54 years, and the stock is still hitting new highs. By contrast, Fred Kindle needed only three years as CEO (2005–2008) to turn around venerable but money-losing Swiss industrial conglomerate ABB and deliver shareholders a 262% total return.

Between those two extremes, many boards default to the mean. The S&P 500 average is 9.2 years, and despite occasional articles exclaiming that CEO tenures are shortening, they aren’t; over the past 20 years they’ve held fairly stable. 

Yet for corporate boards, the average is of limited help. Considering that CEOs with tenures of wildly more and less than 10 years have performed spectacularly, dumping a leader just because he or she has hit the decade mark may not be a slam dunk. As boards face unprecedented pressure to get succession right, a new leadership framework has emerged around when to say when. The matrix is laid out in The Life Cycle of a CEO: The Myths and Truths of How Leaders Succeed, written by Spencer Stuart’s Claudius Hildebrand and Stark and based on an influential earlier article they wrote with Jim Citrin, who leads the firm’s CEO practice. Their model comprises five stages.

Stage one The first year is typically filled with enthusiasm among investors, directors, employees, and the CEO. The stock usually rises.

Stage two In the second year or so, the enthusiasm subsides. Initiatives may take longer than planned, and bad news gets more attention. The CEO is tested in new ways.

Stage three The next two or three years are when CEOs recover from stage two, reinventing themselves as they more confidently deal with the board and Wall Street.

Stage four Years six to 10 are what the Spencer Stuart researchers call the complacency trap. CEOs who have made it this far may start playing defense rather than offense. Instead of launching novel initiatives, they may rationalize why the company’s status quo is just fine for the future. Other CEOs in this stage do the opposite: They realize they must shake up the organization.

Stage five Years 11 and beyond, if the CEO holds on until then, tend to yield excellent performance until year 14 or so. Big bets from years ago may finally start to pay off. Many CEOs are thinking about their legacy.

It’s little wonder that too often the stage-five CEO and the board glide past the performance peak and onto the downward trend line, hoping for a turnaround. As the years go by, the accumulating damage is greater than it seems. The company’s best potential CEO successors get tired of waiting and go elsewhere—a strong signal of an outdated CEO. In addition, a 20-year study of U.S. CEOs shows that a long-tenured CEO’s successor usually performs poorly.

When very long-tenured CEOs (15 years or more) finally leave, chances are good they stayed too long. But no one could have known for sure; along the way there was always hope. In making this decision there are no certainties, only tough calls. 

3 key takeaways from the article

1. How can a company know when it’s time for a CEO to go? Anecdotes fall all over the map. Warren Buffett, the longest-tenured CEO in the Fortune 500, has been running Berkshire Hathaway for 54 years, and the stock is still hitting new highs. By contrast, Fred Kindle needed only three years as CEO (2005–2008) to turn around venerable but money-losing Swiss industrial conglomerate ABB and deliver shareholders a 262% total return.
2. Between those two extremes, many boards default to the mean. The S&P 500 average is 9.2 years, and despite occasional articles exclaiming that CEO tenures are shortening, they aren’t; over the past 20 years they’ve held fairly stable. 
3. Considering that CEOs with tenures of wildly more and less than 10 years have performed spectacularly, dumping a leader just because he or she has hit the decade mark may not be a slam dunk. As boards face unprecedented pressure to get succession right, a new leadership framework has emerged around when to say when.  The model comprises five stages.  In making this decision there are no certainties, only tough calls. 

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Topics:  Leadership, Succession, CEO, Longevity, Board of Directors