Blue Dots Partners

CEOs are keeping their jobs longer today than in the past. The average tenure of an S&P CEO is now 9.7 years and CEOs overall are serving an average of 7.6 years [1]. Length in position is up nearly one full year since 2005 [2].

No doubt the long-running bull market explains part of the increased “life span”. Whatever the explanation, there is a provocative question: is longer tenure good for the company and its shareholders or only for the CEO?

The answer, at least from one set of researchers, is that longer tenures negatively impact companies.

Academics at Temple University and the University of Missouri studied 365 US companies and their CEOs over a ten-year period. They analyzed the interaction among CEO tenure, company performance, and two variables: the strength of the company’s relationship with its employees and the strength of its relationship with customers.

Their first finding is no surprise. The longer a CEO serves, the stronger the relationship between the company and its employees. However, their second finding was startling: over time, longer tenures tend to result in weakened relationships with customers.

I don’t know any CEO who would willingly accept that second finding. Company leaders pride themselves on the time they spend with customers and the relationships they build. However, the researchers quantitatively demonstrate declines in customer relationships and trace them to two factors. First, CEOs who have been in the role for an extended period tend to rely more on their employees for information and are less in tune, personally, with market conditions and customers. They are more inward-looking. Second, longer-tenured CEOs have a tendency to avoid riskier growth strategies in favor of stability. They do not pay sufficient attention to changing customer behavior or needs and do not respond to those changes by initiating new initiatives that align well with and capitalize on new market and customer directions.

Based on the data, the researchers were able to calculate that 4.8 years is the optimal CEO tenure to build employee relationships without hitting the point of declining customer relationships. Of course every CEO is a unique individual who should be evaluated relative to their specific environment. Plus, we can all name numerous CEOs whose leadership through decades refutes the 4.8 year conclusion: Dave Packard, Jack Welch, Steve Jobs, Warren Buffett, Max Messner, Fred Smith and Neal Patterson to name a few.

Still, while the findings are controversial, at a minimum the research provides a tool for CEOs and boards to counter the risk of an inward-looking approach and weakened customer relationships. Instead, boards can adjust CEO compensation to motivate and reward CEO effectiveness by encouraging better alignment with customers and thoughtful risk-taking.

[1] “How does CEO tenure matter?”, Temple University, University of Missouri, published in Strategic Management, March 2013.

[2] Equilar Board Intelligence, January 6, 2016.