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What Impact Does CEO Tenure Have on a Company’s Success?
A successful CEO will have the ability to make smart decisions in a time of stress and will produce results that increase the value for their shareholders.
A common debate in the business world is what CEO characteristics will produce positive results for a company. At the top of the list is often the CEO’s tenure. While this placement makes sense, it introduces an interesting question: how much influence does an executive team’s tenure truly have on the overall success of the company?
In general, the tenure of a CEO is believed to have a positive correlation with the success of the company. However, it is important to understand the difference between correlation and causation.
Studies show that a CEO’s tenure with a company beyond the CEO position has a positive correlation with the success of a company. A study of the 36 most successful S&P 500 index companies from 1988 to 2007 demonstrated that the top companies attributed their success to “home grown” CEO talent. In fact, no non-financial S&P 500 index company could generate the 20-year performance numbers that reached or surpassed the performance of those top 36 in any of the study metrics.
The Wall Street Journal also wrote an article discussing the correlation between companies with CEOs in the position for longer than 15 years and their stock prices within that same time frame. The results showed that out of 28 companies with CEOs who had been in their position for longer than 15 years, 25 CEOs saw their total shareholder return exceed the S&P 500 index performance during their time.
However, other studies illustrate conflicting results. Instead of finding positive effects, one study found that executives who have spent more time with the company become committed to the status quo of the organization. Instead, these longer-tenure executives tended to associate negative outcomes with external factors. This usually resulted in a decrease in their decision-making skills, potentially leading to poor performance in the future.
Clarkston Consulting adjacency Enlight Research is also looking into this phenomenon, specifically in the Consumer Products industry. Sample companies included Avon, Kellogg, Tyson, Colgate, and more. Enlight used the independent variables EPS growth and revenue growth and the dependent variable CEO tenure to determine the success of the company. In the end, there was no major correlation among the variables.
The difference among these studies can be explained by a simple idea: correlation does not equal causation. A 2008 study reported that the average North American corporate CEO tenure is 7.9 years, but that number drops to 4.6 years if the CEO produces poor results. Another study found that CEO “survival” is associated with how their performance mitigates uncertainty about their ability, thus leading to a longer tenure. While it may seem that CEOs who spend longer time in their position are causing higher performance, a CEO will only spend a long time in his or her position if the company achieves positive performance. Thus, a positive or negative correlation between CEO tenure and company performance does not tell us whether or not the CEO’s tenure is driving the company’s success.
It is impossible to say for sure whether a longer CEO tenure leads to stronger corporate results or if stronger corporate results lead to a longer CEO tenure.
A successful CEO will have the ability to make smart decisions in a time of stress and will produce results that increase the value for their shareholders. In the end, these characteristics are learned through experience, not through tenure with one company.