Does Long CEO Tenure Help or Hurt a Company? - Board News

Does Long CEO Tenure Help or Hurt a Company?

It might sound ideal: a successful company led for many years by a dedicated, long-standing CEO. After all, people tend to get better at their jobs as they gain more experience, right?

That reasoning may sound logical, but research indicates that long CEO tenure may actually be counterproductive. Here’s a closer look at why long CEO tenure might not be a good thing for your company at all.

The Seasons of Leadership

No leader stays the same throughout their entire tenure. You may have heard people talk about the “seasons” of a CEO’s time at a given company. They might be referring to an often-cited 1991 article that outlined five seasons of a CEO’s tenure:

  • Response to Mandate: The new CEO understands what’s expected of them and then works to meet those expectations
  • Experimentation: They begin trying different leadership methods to see which best suits them and the company
  • Selection of an Enduring Theme: They find and select the various methods that work best for them
  • Convergence: They begin a long period of small changes that adjust the company to fit that theme
  • Dysfunction: They begin to become burned out, complacent, and/or overly risk-averse

Not all CEOs follow this exact pattern in this exact order, but these general seasons are commonly accepted in the business world. But how soon does dysfunction, the final and disappointing season, set in? More recent researchers might have found the answer.

4.8 Years is the Ideal CEO Tenure

One fascinating study aimed to take a more quantitative look at how a CEO’s tenure impacted a company. In this study, the authors followed over 300 companies for 10 years. Over that time period, they assessed the overall health of each company using the following metrics:

  • The relationship between the company and customers (this was done by examining product safety, quality, etc.)
  • The relationship between the company and employees (this was done by looking at layoffs, retirement benefits, etc.)
  • The magnitude of stock returns
  • The volatility of stock returns

Through their analysis, researchers found that with all of these things considered, the ideal tenure length for a CEO was 4.8 years.

Why CEOs Start Strong & Become Less Effective Over Time

Why is 4.8 years the ideal tenure? Using their own insights and information from past research, the authors of the study developed an explanation as to why long CEO tenure can be harmful to a company’s success and overall functioning.

New Executives Seek Information

Capable executives know what they don’t know. So once a new CEO starts their tenure, they learn all that they can about the company. During that learning process, they get information from inside the company and outside of it.

Often, in the process of gaining that information, the new CEO forges powerful relationships with both employees and customers. They use those relationships (and the information gleaned from them) to develop strategies that take the company in the right direction. 

Unfortunately, this phase of gathering and applying new information nearly always comes to an end.

As a result, the business stagnates and performance suffers.

Long-Tenured Executives Become Entrenched

CEOs tend to find strategies that work and then stick with them. This might sound great in theory, but as executives become more comfortable, they start to rely on already established internal networks for information.

And often, they’re so focused on these networks that they stop paying attention to evolving customer preferences and changing market conditions.

The longer a CEO stays with a company, the more invested they become.

This can also be a good thing, but many of these CEOs become overly risk-averse in their efforts to protect the company from losses.

Can You Stop the Changing Seasons?

Research seems to paint a grim picture for CEOs with long tenures. But the good news is that long-tenured CEOs might be able to avoid some of the pitfalls of staying on past 4.8 years. If the board of directors makes a few strategic moves, it might be able to avoid dysfunction and stagnating performance.

Keep a Watchful Eye on the Marketplace

Over long tenures, CEOs tend to become less responsive to marketplace conditions. If the board of directors is aware of this general trend, its members may be able to spot an executive’s disengagement before it harms the company’s overall performance.

Monitor Customer Relations

Over time, CEOs tend to focus more of their communication inward. When this happens, the board of directors might start to see a breakdown in customer relations. 

It’s best to spot these types of shifts sooner rather than later. So as soon as the board notices a change in customer relations, it’s wise to investigate further. If customer relations are in decline, the board can then collaborate with the CEO to remedy the issue as quickly as possible.

Create Incentive Programs

What’s the board to do if the CEO stops being attuned to the market and/or customer demands? As the CEO’s tenure stretches on, board members may be able to counter the usual trends by developing specialized incentive programs. 

If these programs are connected to marketplace and consumer metrics, the CEO may be able to maintain engagement and keep the company on the right track.

Should You Aim for a Long-Standing CEO?

The short answer here is that long tenure for CEOs is not good in and of itself. Given the research around long-standing CEOs, keeping your company’s CEO around for a long time probably isn’t something you should aim for. 

If you can avoid the stagnation that comes with many long-standing CEOs, you can spare your company some of the issues that so often follow.

But if you have a successful CEO, a long tenure isn’t reason enough to start looking for a replacement. By keeping a watchful eye on typical problem areas and taking steps to intervene early on, a company’s board of directors may well be able to keep the CEO focused and support the company’s continued growth.

Contributed by Cowen Partners Executive Search, a national executive search firm offering CEO and Board services to private, public, and non profit organizations.

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