People@work. How about an MRP for CEOs?

Say you are a CXO of a large company in your late 40s, and your board appoints an external CEO or extends the contract of the current CEO by five years. What would you do?

Over the past three recessions, CEO succession declined by 30 per cent, says Spencer Stuart’s research, as boards seek stability during turbulent times. However, a great reshuffle of CEOs is underway in Indian IT services companies. What did you observe about the recent leadership movements in TCS, Cognizant, TechM and Zensar other than the obvious fact that three of them got CEOs from Infosys? Beyond that, can we detect layers of leadership overstaying, lack of succession, and age factors, all rolled together in different gradients?

Overstaying

“Did I overstay?” That was the question I asked myself when I finally hung up my boots at 44. I worked seven-and-a-half years as an MD, and when I look back honestly I feel my mandate to turn around was sort of over at the end of the fifth year. But I hung around, maybe to enjoy the fruits or not knowing what to do next. Some boards believe successful CEOs should continue till they fail or age before they make the inevitable change. Maybe some are influenced by “If it ain’t broke, don’t fix it”. When your competitor is hiring your young leaders as CEO, is there a message for you that you are not looking at your homegrown talent with the right lens?

Succession

All the recent CEO appointments, except in the case of TCS, have been outsiders. Interestingly, some of these companies that hired external CEOs have lost their own leaders as CEOs to peers. These recruitments demonstrate that Cognizant and Infosys had a healthy senior leadership pipeline, from which other IT services companies gained. From the outside, one wouldn’t know the context of these companies and these individuals, but it seems that the grass is definitely greener on the other side when hiring CEOs from competitors.

Another question that needs scrutiny is whether these companies are seeking ‘clear fits’ when it comes to promoting their own talent, while ready to take a ‘near fit’ when hiring outsiders. How else do you explain hiring people who were one level below at competition as your CEO but ignoring your own young leaders as possible successors? It makes for great reading when organisations are labelled as CEO factories. The irony is that many of these companies are scared to taste their own medicine.

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A Booz Hamilton study indicates that insider CEOs delivered superior shareholder returns in seven out of 10 years. TCS has consistently demonstrated the value of internal succession.

The ideal tenure

According to a Harvard research paper titled ‘The CEO lifecycle’, which studied 747 S&P 500 CEOs between 2004 and 2017, the best-performing CEOs had an average tenure of 15 years, more than double the S&P average of 7.2 years. Based on that study, one can argue that successful CEOs get higher tenure, or that boards that are patient build successful CEOs. But not all long tenures work. GE had two CEOs with long tenures — Jack Welch for 20 years and his successor, Jeff Immelt, for 16. It is widely believed that the latter tenure was not that successful for GE. In the modern era, can any board be gutsy enough to recruit a CEO beyond a three-year horizon? In recent years, we have seen Infy, Wipro and Cognizant replacing their external appointee CEOs within the first four years.

Five-year term

Just like the 22nd amendment to the US Constitution limits the number of presidential terms, should enterprises also adopt policies to limit CEO tenure? One can say it depends on the CEO’s age and the company’s performance. Would a five-year term for CEOs be ideal? A PwC study of 2,500 large global companies during 2004-18 shows an average CEO tenure of five years. A business newspaper’s analysis of BSE 500 companies over the past decade suggests an average tenure of 3.4 years for Indian CEOs. Interestingly, over 72 per cent of these CEOs resigned during 2016-20, rather than retired. So, a five-year term is worth exploring.

If every large company CEO knew they only had five years in a role, how would they go about their job? Would it allow them to integrate into the role faster, bring higher customer focus, and build a talent pipeline to succeed them than hang around by managing the board? Unfortunately, succession is rarely measured or incentivised, unlike market share, profitability and stock price. Hence, the competitors gain more than the employers who spent decades building these leaders.

Epiphany

Expecting CEOs to step down voluntarily after a certain period would be too much. Just like the US Congress in 1978 put out a mandatory retirement policy for CEOs at 65 years, should Indian boards also consider a maximum CEO tenure for agile performance, better governance, and planned succession?

“You either die a hero or live long enough to see yourself become the villain,” is an apt quote to remember for all CEOs.

(Kamal Karanth is Co-Founder of specialist staffing firm Xpheno)

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