Opinion

Leadership: A look at the optimum tenure length for a company's chief

8 min read

28 March 2015

With David Cameron revealing that he would not stand for a third term as prime minister, Real Business looks at the issue of the optimum time for someone to be in charge. Where does the benefit of new ideas begin to slip into a stagnated approach?

“There definitely comes a time where a fresh pair of eyes and fresh leadership would be good. There’s plenty of talent there. I’m surrounded by very good people,” he told the BBC.

Some called Cameron’s statement presumptuous given that it still remains uncertain whether the British public will even allow him a second term at the polls on 7 May.

However it does raise important questions about the longevity of leadership. How long should the man or woman at the top have in charge for the good of his or her’s organisation?

In the world of politics longevity is primarily decided at the ballot box – on 8 May it is very likely that only one out of Cameron, Labour leader Ed Miliband and Liberal Democrats chief Nick Clegg will remain in charge of their respective parties.

The cycle of political leadership, with its definitive end point in the shape of a general election, prompts change and new thinking. How do we go about replacing a set of ideas which have just been rejected by millions of people? The answer is change at the top.

In the football world top Premier League bosses have an average lifespan of about 13.5 months in the job according to data from Opta Sports. Media and fans decry such short periods of leadership bemoaning a failure of owners and chairmen to give the new man time to build a team, hone tactics and develop strong youth systems.

Knowing they have such a short time in the job, critics say, makes football bosses rush decisions, make panic buys and struggle to gain authority over players who are used to seeing their bosses come and go.

Look at Alex Ferguson, who won 38 trophies with Manchester United in his 27 years in charge of the club. That is the reward for patience and longevity – allowing a talented manager time and freedom to embed their ideas, character and strategy into an organisation.

The longest serving Premier League boss at present is Arsene Wenger of Arsenal. Again trophy laden in the early part of his 19 year reign but more recently criticised for a staleness and stubbornness which has left the club often struggling on the park.

What does this all mean for business leadership? According to a recent study from consultants Strategy&, the average tenure of a boss at the world’s largest 2,500 companies is six and a half years.

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Another study from Temple University, looking at the relationship between the tenure of a boss and a company’s share price, meant that the optimal time at the top should only be 4.8 years. Xueming Luo, who was one of the study’s authors, said that any longer than this optimal time (especially if a boss is in charge for a decade) makes the chief executive “risk-averse and slow to adapt to change leading to declining company performance”.

Intriguingly it found that the longer a boss is in charge his or her relationship and engagement with employees becomes better but the relationship with customers becomes worse as quality of product decreases.

In a chief executive’s early years they are hungry for information and knowledge from both within, talking to staff and fellow managers, and outside the company talking to customers.

However over time the chief executive becomes insulated, relying more on internal and supportive staff rather than talking and listening to customers and noting their changing preferences. As bosses get tied up with bonuses and share holdings within a firm they also become less keen to take chances and pursue innovation. They seek to avoid losses not chase after gains.

Bosses who stay too long, the theory goes, also pursue outdated and out of touch strategies. They also hamper the ambitions of their very able deputies who may decide to jump ship and head off to another organisation knowing their own dreams of being a boss will be better served there.

But consider the alternative view. Look at the successful and lengthy tenures of business giants such as Rupert Murdoch, Jeff Bezos at Amazon, Richard Branson, Martin Sorrell at FTSE advertising group WPP and Martin Gilbert at Aberdeen Asset Management.

All bosses in charge for many years and all leading superb growth. Not for them – the risk of chopping and changing bosses every few years, raising the temptation of the short-lived incumbent to set a short-term course aimed at rapid growth.

Almost like the thinking of a private equity firm. Focus on that four or five years in charge by cutting, saving, pushing and just focusing on the share price and bottom line. To hang with the staff and the suppliers and the customers.

The answer perhaps lies in a happy median – seven or eight years. Long enough for a chief executive to lay down a strategy, build up a team and to remain fresh in their own minds to pursue innovation and listen to customers and note changing preferences and market trends.

Short enough to allay the problems of staleness and insularity and the thwarted ambitions of talented deputies.

Bosses who find it difficult to leave, particularly those who have created an organisation from scratch, should think about the delegation of powers as time goes on. They must be open to new and alternative strategical ideas and constantly keep in touch with clients and customers.

Bosses with big personalities who are closely associated with a firm by the public – ask ten people in the street whether Stelios haji-ioannou is still in charge of airline easyjet and no doubt three or four will say yes – have an added pressure. It is not so easy for them to take a step back when they find their thinking or energies becoming tired.

But it is healthy for bosses to be thinking about succession strategies perhaps building a team with that in mind.

Cameron may have jumped the gun slightly and be left fighting fires over leadership challenges in the next two or three years, but his intentions are sound. He has identified the need for fresh thinking at the top and that is something all British bosses should be aware of to keep their businesses powering.

If you have any thoughts on the issue, please let us know in the comments box below.

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