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."

Newest Published Case Studies!

My newest case study and teaching note is now available in the Ivey Case Collection. The case focuses on Viking Cruises and examines their entry into the expedition cruise segment. Great case about the power of making strategic tradeoffs.

This publication comes in addition to several other recent case studies that I have published. You may wish to take a look, particularly if you are teaching courses in strategy or leadership/organizational behavior.

• Tractor Supply Co.  (co-authored with David Ager) 
• Executive Decision Making At Zola (co-authored with Amy Edmondson)
• Boeing 737 MAX: Company Culture and Product Failure
• Case Companion (an online tutorial regarding how to analyze a case study)

Coddling Employees vs. Fostering Learning & Improvement

Source: https://sabrinabakare.com/zone-of-discomfort

Alexandra Buell and Lindsay Ellis have written a startling Wall Street Journal article that is sure to receive a great deal of discussion this week.  I'm grateful that they have written this piece. The article is titled, "‘Feedback’ Is Now Too Harsh. The New Word Is Feedforward." The subtitle is: "More companies are ditching anxiety-inducing corporate lingo for what they see as gentler terms. Reviews become ‘connect’ sessions.'" Buell and Ellis write:

Employers around the country have good news for workers who dread chats about their performance: Feedback is on the way out.  Many companies, executive coaches and HR professionals are looking to erase the anxiety-inducing word from the corporate lexicon, and some are urging it be replaced by what they see as a gentler, more constructive word: “feedforward.”  Feedback too often leaves workers feeling defeated, weighed down by past actions instead of considering the next steps ahead, but “feedforward” encourages improvement and development, its proponents say... Companies are also banishing another negatively charged term: “review,” which they are replacing with “connect” sessions, coaching, self-reflection and opportunity discussions."

My initial reaction:  Are you kidding me?!?!?!   I certainly understand how employee reviews can be counterproductive at times.  Many managers struggle to provide evaluations and improvement recommendations effectively.  Employees sometimes become defensive, fail to acknowledge their own weaknesses, and do not heed the advice of their managers.  Yes, we have to improve the way we provide recognition, praise, and constructive criticism to employees.  There is no doubt about that.  I commend those experts in human resources and executive coaching who are working on these critical challenges.  However, there's a fine line between getting better at these important managerial processes and simply coddling employees.  It sure seems as though we might be crossing the line in some organizations.  Moreover, many employees may simply look at these changes in terminology as window dressing.  If they perceive the wording change as such, they may grow more cynical and skeptical about their leaders.  Trust and employee engagement may actually erode in those organizations.  In short, we may be doing more harm than good when we use terms such as "feedforward"or "opportunity sessions."  

Giving and receiving feedback induces anxiety and stress in many individuals.   We have all experienced it. However, our goal should not be to eliminate all discomfort in these difficult conversations. Some level of discomfort is critical to the self-reflection and learning process. We have to confront the truth, not run from it. Avoiding all discomfort should not be the goal.

I'm reminded of something my dissertation adviser and mentor, David Garvin, used to say to me as I worked on my thesis, developed my first case studies, and learned how to teach. He would quote Dr. Peter Carruthers of the Los Alamos National Laboratory:

“There’s a special tension to people who are constantly in the position of making new knowledge. You’re always out of equilibrium. When I was young, I was deeply troubled by this. Finally, I realized that if I understood too clearly what I was doing, where I was going, then I probably wasn’t working on anything very interesting.”

In short, David would remind me that discomfort was natural when receiving feedback. Being asked to make countless revisions in my work was frustrating at times. David would remind me of how far I had come thanks to the suggestions and recommendations of others. I'm thankful for all that constructive criticism early in my career. I benefited greatly from it.  I'm glad others strove to maximize my learning, rather than striving to minimize my discomfort.  

Lies, Lies, Lies: Hiring Managers and Job Candidates

Fortune's Paige McGlaufin and Joseph Abrams reported this week on some rather shocking survey results.  Resume Builder polled 1,600 hiring managers, and 36% of those individuals acknowledged they had lied to job candidates. McGlaufin and Abrams write, "Of hiring managers who admit to lying, around 75% say they lie during the interview, 52% in the job description, and 24% in the offer letter."  Moreover, many of these respondents indicated that they deceived candidates quite often.  Why do so many hiring managers lie?  The authors write,

"Some reasons hiring managers gave for lying include protecting sensitive company information, covering up negative company information, exaggerating benefits to attract job seekers, and generally making the job sound more attractive to find better candidates. What these managers falsify also varies—the most common lies are about the job’s responsibilities, growth and career development opportunities at the company, and company culture."

We have heard so much lately about the lack of trust and engagement among employees in many companies.  We've attributed these poor outcomes to a variety of leadership failures, but I've rarely read about how the problem may begin BEFORE the employee actually starts the job.  If someone is lied to during the hiring process, and then discovers the deception while on the job, they are highly likely to become disenchanted.  Many will simply quit.   In fact, the survey respondents indicated that roughly half of the employees who were deceived eventually quit the organization when they discovered the lies.

This article caused me to consider the incentive structure that these hiring managers likely face.  How are they measured and rewarded?  How does their ability to fill positions quickly affect their compensation and promotions?  By focusing on incentives, I'm not suggesting that we should excuse the unethical behavior.  However, we cannot simply hope to hire more trustworthy recruiters. The problem is not simply the ethics of certain individuals.  Given the widespread deception, we have to think systemically about the causes of the problem.  If we don't change the incentives, and the broader culture around recruiting, then the lies will likely continue.  

Tractor Supply Podcast and Case Study

Thank you to Joe Weisenthal and Tracy Alloway for having me on the Bloomberg Odd Lots podcast to talk about my latest HBS case study co-authored with David Ager.  The podcast episode is titled, "Why Tractor Supply is One of the Most Interesting Retailers on the Planet"

Will Rao's Thrive After Acquisition by Campbell's?

This week, Campbell's announced the $2.7 billion acquisition of Sovos Brands, a firm whose most famous and successful brand is Rao's.  If you aren't familiar with the brand, you should be.  It's simply the very best tomato sauce sold in the United States, and frankly, there shouldn't even be a moment of debate.  I should know.  As the son of Italian immigrants, I grew up never eating tomato sauce from a jar. We had a huge vegetable garden, and my parents grew tomatoes and made their own sauce. Still today, I grow my own tomatoes and store sauce for the winter, though I don't jar enough to last the entire year. When I have to purchase sauce, there's only one brand that I will purchase in a jar - Rao's marinara sauce. As a fan of the brand, I'm hardly alone. Ben Cohen of the Wall Street Journal writes, "Rao’s deliciousness is undeniable. Bon Appétit magazine called it “the best jarred pasta sauce there ever was.” When the Washington Post convened a panel of taste-testers, the judges tried a dozen brands and declared Rao’s their favorite."   Rao's is hardly a bargain though.  It's a premium brand.  A 32 ounce jar of Rao's currently sells for $10.29 at Stop & Shop.  You can purchase a 24 ounce jar of Ragu for $1.99.   Now you might think that I'm crazy to pay that kind of a premium for tomato sauce, but you would be wrong.  It's absolutely worth it! 

The Campbell's acquisition may be beneficial, but it understandably generates some concern.  Campbell's is known for selling a very affordable line of soups.  How will the premium brand Rao's fare within the Campbell's portfolio?  The company's track record of acquisitions is decidedly mixed.  In the late 1960s, it acquired Godiva's chocolates.  That brand thrived under Campbell's ownership for many years, but ultimately, the company divested Godiva because it didn't fit very well with the other products in the portfolio.  More recently, the company divested Bolthouse Farms at a steep discount to the price they had acquired the brand for just seven years earlier.  

The question remains whether valuable synergies exist between Campbell's and Rao's.  Why are these firms more valuable together than apart?  Can Campbell's manage the brand more successfully than it has already been managed?  That seems unlikely, given the parent company's lack of recent familiarity and success with super premium brands.  Moreover, they aren't buying a brand in distress; they are purchasing a brand that is already performing at a very high level.

Any attempt to drive synergies must be taken with caution as it may dilute the quality of the premium tomato sauce brand. For now, Campbell's has assured customers and investors that it won't change the taste and quality of the popular tomato sauce. Still,  we should expect some pressure to justify the acquisition premium by creating synergies.  That pressure can be counterproductive at times when mainstream companies acquire much more premium brands.  

Why Too Many Goals Can Be Counterproductive

Increasingly, organizations face pressure to achieve a range of goals, extending well beyond profitability and shareholder value maximization.  Many people note the benefits of this broader perspective.   Interestingly, though, Dartmouth Professor Pino Audia's work highlights one potential negative effect of defining too many goals as an organization.  Here's an excerpt from Kirk Kardashian's feature on the Dartmouth Tuck School of Business website regarding Audia's research:

Conventional wisdom says setting goals is a good practice, because it helps people and organizations accomplish their priorities. But it’s not that simple.  “Ironically,” says Pino Audia, Professor of Management and Organizations at Tuck, “having too many goals can make corporations less accountable.”   Audia has come to this perspective after 15 years of researching when organizations learn from failure, including writing a new book on the topic: Organizational Learning from Performance Feedback: A Behavioral Perspective on Multiple Goals (Cambridge University Press, 2021). One of his main contributions to the field of organizational behavior is his discovery that people show a tendency to form self-enhancing assessments of their performance. This tendency thrives in situations where performance metrics are ambiguous, giving people the latitude to see their own performance in a good light, even if others might assess it more harshly. “The proliferation of corporate goals creates greater ambiguity,” Audia explains, “and that creates greater latitude for self-enhancing assessments of performance.”

What does Audia mean by self-enhancement?  He argues that many business leaders don't learn effectively from failure because they find ways to convince themselves that they did not fail.  They try desperately to maintain their positive self-image in the face of disappointing results.  The establishment of a diverse range of objectives facilitates this self-delusion!  If many goals have been defined, they might point to the strong performance on a few of those goals, while trying to ignore or downplay poor performance on a range of other objectives.  Kardashian writes that, "a key feature of self-enhancing decision makers is that they are cognitively agile in the sense that they change the parameters used to assess performance to reach more favorable assessments."   Sadly, this "cognitive agility" means that leaders and organizations don't learn from failure as effectively as they should.  

Do Leaders Know What Employees Really, Really Want?

Source: www.lovetoknow.com

Fortune's Phil Wahba has written an intriguing article titled, "Too many CEOs don’t know what their workers need. Employee ‘engagement’ surveys can make the problem even worse." Wahba starts by giving an interesting example from Starbucks. He points out that former CEO Howard Schultz often took great pride in the tuition assistance program offered to company employees. Wahba writes:

It turns out that for many Starbucks “partners,” as the company calls its employees, tuition help at an online university wasn’t that crucial. They’ve proven to be far more interested in prosaic matters such as flexible scheduling, work conditions, and more predictable hours—the kinds of issues that have a much greater short-term impact on their income and quality of life.

Wahba goes on to critique employee engagement surveys administered annually by many organizations.  He notes that many questions are fuzzy and unclear.  The responses do not necessarily provide clear direction as to how leaders should change policies or behaviors.  At times, companies present the data in ways that make things appear better than they actually are.  He gives the example of firms that sometimes lump "4" and "5" responses together when reporting the data.  Of course, a "4" might be quite different than a "5" response.  Moreover, while the overall mean might look good on a particular question, certain subsets of the employee population might be responding much more negatively.  Finally, leaders don't always close the loop by communicating clearly to employees how they are making changes based on the survey results.  Employees think to themselves, "Why are we doing this? Are they actually taking our views into consideration? Is it just a waste of time?"  

Wharton's Peter Capelli offers a simple suggestion: ask managers to talk to their reports! He tells Wahba, "You could have supervisors actually go talk to people. Employees are usually not shy about telling their direct boss what’s going on."  In short, there's no substitute for one-on-one communication in which managers listen to employee concerns and then circle back to address them.  No survey can replace those valuable conversations.