CEOs: Why You Should Quit While You're Ahead
It's nice to be at the top, isn't it? Unfortunately, staying in that CEO spot too long may not be the best thing for your company.
In fact, according to Michael Jarrett, a professor in organizational behavior at INSEAD, companies suffer because CEOs usually don't leave until they're forced out. Instead of overstaying your welcome, he writes in the Harvard Business Review, CEOs should not stay more than five years.
A 2013 study by Xueming Luo, Vamsi K. Kanuri, and Michelle Andrews at the University of Texas, Arlington, found that the optimal CEO tenure is 4.8 years--enough time to implement changes to help the company become successful and not long enough to hurt the company's performance. After five years, CEOs generally get "stale in the saddle" and stop being adaptive and innovative, Donald Hambrick, author and distinguished business professor at Penn State and Columbia University, told Jarrett.
Below, read three reasons why CEOs should step down before they are forced out.
A long tenture impacts the company's returns.
The report by Luo, Kanuri, and Andrews studied 356 U.S. companies like Pfizer and Proctor & Gamble from 2000 to 2010 and found that the longer a CEO stays, the stronger the relationships with his or her employees become. Initially, the CEO will strengthen customer ties--but only for a time, "after which the relationship weakens and the company's performance diminishes, no matter how united and committed the workforce is," the study found. The team's research found that when a CEO stays over five years, customer relationships, product safety and quality, and financial returns will all decline. Yes, the below reasons...
You're more likely to settle for the status quo.
After you become comfortable with the CEO role, complacency will surface. Once that happens, the status quo will be widely accepted throughout the company. "After the initial rush of enthusiasm and energy, established routines and networks can smother the drive for innovation," Jarrett writes. There are obvious exceptions, like Apple's Steve Jobs and GE's Jack Welch, but those are rare cases. Jarrett says CEO succession is important because "new CEOs are more open, inclusive, and search for new solutions."
You stop learning.
Luo, Kanuri, and Andrews found that over a CEO's tenure, his or her learning style changes and thus affects the customers. Initially, you "seek information in diverse ways, turning to both external and internal company sources," which helps strengthen the relationships between customers and employees, the study found. "But as CEOs accumulate knowledge and become entrenched, they rely more on their internal networks for information, growing less attuned to market conditions," the authors say. Once you become more and more invested in the company and your employees, you're more likely to "favor avoiding losses over pursuing gains" and you'll be "less responsive to vacillating consumer preferences," the team says.
What do you think, entrepreneurs? Should your tenure at the top have an expiration date?
WILL YAKOWICZ | Staff Writer | Reporter, Inc.com
Will Yakowicz is a staff writer for Inc. magazine. He has covered business, crime, and local politics for The Brooklyn Paper and was the editor of Park Slope Patch. He has also reported on the West Bank and Moscow for Tablet Magazine. He lives in Brooklyn, New York.