Wednesday, September 27, 2023

The Relationship Between Leader Tenure and Organizational Performance


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.

Wednesday, September 13, 2023

Coddling Employees vs. Fostering Learning & Improvement


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.