Thursday, October 04, 2018

CEO Tenure: What Does the Evidence Indicate?

John Stoll has published an interesting article in the Wall Street Journal today about CEO tenure. He  describes academic research by Xueming Luo, Vamsi K. Kanuri, and Michelle Andrews. Their work examines the optimal tenure of a chief executive. The scholars conclude that the optimal tenure is roughly five years. Here's Stoll's summary of their work, with some comments from the researchers: 

We tend to celebrate long tenure, but there is evidence that boards are becoming less patient, and that’s a good thing. Researchers, studying a decade’s worth of financial and share-price performance of hundreds of large-cap companies, found that the “optimal tenure length” is 4.8 years.

Xueming Luo, a professor at Temple University’s Fox School of Business and one of the authors of a widely cited 2012 study, said CEOs are most effective in the initial years because they are more open to outside opinions and less risk-averse. “The search for external knowledge tends to end,” he told me this week.

“It eventually becomes a situation where the CEO surrounds themselves with a lot of ‘yes’ people,” Michelle Andrews, a coauthor of Dr. Luo, said. “At a certain point, there are diminishing returns.”  Leaders operating in declining markets and other volatile environments, Dr. Luo said, tend to turn inward faster than if things are going smoothly.

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