Give your CEO five years – then it’s judgement day

“Worldwide, boards of large corporations are dismissing four times more CEOs today then in 1995, a trend that raises an important question: Are boards undermining the chief executive’s ability to lead for the long term?

…Booz Allen Hamilton’s decade-long study of CEO turnover at the 2,500 largest companies in the world points to a different answer. Boards aren’t overreacting. They are doing what they should have been doing all along: removing clearly inadequate CEOs who in years past would have been sheltered by faulty corporate governance.”

Chuck Lucier & Jan Dyer, Harvard Business Review (Jul-Aug 2007)

Sacking the CEO is done less often than it should be. The position is so exalted that the occupant can seem above reproach. Critical questioning is often replaced by excessive deference and fawning subservience.

Lucier and Dyer, in their piece The Hidden Good News About CEO Dismissals, point out that the vast majority of those CEOs getting the axe in the Booz Allen study were dumped because of dismal financial results stemming from a significant deterioration in the companys’ core business. And there’s nothing wrong with that.

The bad old days of the “imperial CEO” are fast leaving us, and so they should. A great CEO is a vital pre-requisite for companies to achieve greatness; but a bad one can do lasting and irreparable damage if left on the hot seat for too long. Even very qualified, very impressive CEOs can make a complete hash of the job – and it is a board’s responsibility to know when this is happening.

Please don’t imagine, however, that there is an epidemic of brutal sackings taking place now. Fewer than 5 per cent of CEOs in the study were fired in 2005 – but that is a considerable improvement on the just over 1 per cent that left against their own volition in 1995.

Boards today take courage from recent corporate governance reform. But what they must do is give CEOs a fair crack of the whip – a chance to prove themselves over a decent period of time.

What is ‘decent’? The authors point out that today, as was the case ten years ago, dismissed CEOs get the boot in their sixth year in charge, on average. In other words they are given five good years to prove their worth and the value of their ideas and initiatives. If year six arrives and profit, cash flow and market capitalisation are not rising fast – then the knives are sharpened.

This makes sense. Fewer than five years does not give a leader a chance to prove the longer-term impact of his or her strategies; more than that would be a dangerous game to play with shareholders’ money.

Two caveats are in order, however. The five-year period is not a period of tenure, merely a time of testing. Once a CEO has proved her worth, she may well carry on for many more years hence.

Equally, if you have a real joker on your hands, that fact is usually very quickly evident. Boards are often reluctant to admit their recruitment mistakes – and that reluctance can be very, very expensive for the shareholders. When the man in charge is an obvious dud, the board has no need to wait for five years. Just press ‘eject’ now.

Like it? Hate it? Engage here