The Relationship Between Leader Tenure and Organizational Performance

Source: https://fs.blog/open-closed-minded/

Can CEOs stay in office too long?  Do lengthy tenures often lead to poor performance?  In an influential paper published in the 1990s, Donald Hambrick and Gregory Fukutomi argued that CEOs experience "seasons" of their tenure.  Performance increases as they learn during the early years.  In those initial years, they are more open to experimentation and alternative viewpoints.  If they stay too long, leaders become entrenched in their views, closed-minded, and less open to dissent.   They begin to believe their own press clippings if they have been quite successful.  They tend to overly attribute the organization's success to their own prowess, rather than recognizing the positive impact of other members of the organization, favorable industry dynamics, or even good fortune.   Perhaps most alarmingly, long-tenured leaders may be more likely to engage in unethical conduct because they are not subject to adequate oversight, monitoring, and control by ineffective boards of directors. Boards may be so impressed by performance during the early part of a CEO's tenure that they grow more lax in their oversight.  They engage in excess deference to these long-tenured leaders. Hambrick and Fukutomi wrote:

At some point, the positive effects of a CEO's continuing tenure (primarily in increasing task knowledge) are outweighed by the negative effects. Job mastery gives way to boredom; exhilaration to fatigue; strategizing to habituation. Outwardly, such executives may show few signs of this malaise because they may have been well socialized in the importance of keeping up executive impressions and appearances. However, inwardly the spark is dim; openness and responsiveness to stimuli are diminished. The continuing incumbency of these executives is dysfunctional for the organization. 

Recently, Markus Schmid, Francois Brochet, Peter Limbach, and Meik Scholz-Daneshgari published an empirical paper in The Accounting Review examining this hypothesis.  They concluded that the average S&P 1500 firm experiences a positive relatiohship between CEO tenure and firm value for the first 14 years of a leader's tenure.  Then, performance begins to decline.   In short, they confirm the main hypothesis proposed by Hambrick and Fukutomi.   

Schmid and his colleagues offer some important qualifiers though. They find that the decline in performance occurs mostly in highly dynamic industry environments.  In those situations, the decrease in performance starts around Year 11.   In stable environments, performance may plateau, but it doesn't experience this dropoff.  The scholars also discovered another interesting point of variability. They wrote:

"Our results show that firm value peaks earlier during a CEO’s tenure for leaders who are less adaptable to change, namely specialist CEOs with relatively low general managerial skills, relatively older CEOs, and those who were appointed internally, while it peaks later for generalist CEOs and increases over tenure if they are younger or were appointed from outside the firm."