It’s easy to tell when some things have expired. Stock options. Eggs. Prescription meds. Credit cards. But corporate America has long been stumped trying to find a more elusive expiration date: How can a company know when it’s time for a CEO to go? Anecdotes fall all over the map. Warren Buffett, the longest-tenured CEO in the Fortune 500, has been running Berkshire Hathaway for 54 years, and the stock is still hitting new highs. By contrast, Fred Kindle needed only three years as CEO (2005–2008) to turn around venerable but money-losing Swiss industrial conglomerate ABB and deliver shareholders a 262% total return.
Between those two extremes, many boards default to the mean. The S&P 500 average is 9.2 years, and despite occasional articles exclaiming that CEO tenures are shortening, they aren’t; over the past 20 years they’ve held fairly stable. Robert Stark, a succession expert at Spencer Stuart, believes it’s possible that “the average in and of itself becomes a self-fulfilling prophecy. In the absence of any good insight about how long CEOs should serve, they think, ‘Oh, I should be about average.’ ”
But those who study CEOs for a living appear to have homed in on more precise answers—and discovered that the expiration date often arrives just when CEOs have reached that stage where they seem strongest. A 2021 study by researchers from Boston University, the University of Cologne, the University of St. Gallen, and the Karlsruhe Institute of Technology examined S&P 1500 companies over 25 years and found that on average, a company’s value peaks and plateaus around the CEO’s 10th year in the job. After 14 years or so the firm’s value starts to fall, at first by a little, then by a lot, and it keeps declining for as long as the CEO holds on.
To check their findings, the researchers conducted a clever, if morbid, test: How do investors respond to news that the CEO has suddenly died? The data showed that investors consider such an event bad news for the company if the CEO has held the job for 13 years or less. But when the CEO has been there longer than 13 years, investors bid the stock up on the news of a sudden demise; they’re saying the company is better off with the old coot gone.
Yet for corporate boards, the average is of limited help. Considering that CEOs with tenures of wildly more and less than 10 years have performed spectacularly, dumping a leader just because he or she has hit the decade mark may not be a slam dunk. As boards face unprecedented pressure to get succession right, a new leadership framework has emerged around when to say when. The matrix is laid out in The Life Cycle of a CEO: The Myths and Truths of How Leaders Succeed, written by Spencer Stuart’s Claudius Hildebrand and Stark and based on an influential earlier article they wrote with Jim Citrin, who leads the firm’s CEO practice. Their model comprises five stages.
Stage one The first year is typically filled with enthusiasm among investors, directors, employees, and the CEO. The stock usually rises.
Stage two In the second year or so, the enthusiasm subsides. Initiatives may take longer than planned, and bad news gets more attention. The CEO is tested in new ways.
Stage three The next two or three years are when CEOs recover from stage two, reinventing themselves as they more confidently deal with the board and Wall Street.
Stage four Years six to 10 are what the Spencer Stuart researchers call the complacency trap. CEOs who have made it this far may start playing defense rather than offense. Instead of launching novel initiatives, they may rationalize why the company’s status quo is just fine for the future. Other CEOs in this stage do the opposite: They realize they must shake up the organization.
Stage five Years 11 and beyond, if the CEO holds on until then, tend to yield excellent performance until year 14 or so. Big bets from years ago may finally start to pay off. Many CEOs are thinking about their legacy.
Stages four and five, if a CEO gets that far, are when boards have to be most vigilant. CEOs have typically reached the pinnacle by climbing the corporate ladder through promotions every few years. By stage four, they’ve run their tried-and-true managerial playbook as CEO. Now what? Assessing CEOs by their financial track record “may be using the wrong criterion,” says former Medtronic CEO Bill George, who teaches programs for CEOs at Harvard Business School. In stage four, he says, the company needs “somebody who has the mental agility and flexibility to adapt to changing conditions.” George had those abilities and went a step beyond. When he became Medtronic’s CEO, he announced that he wouldn’t stay in the job for more than 10 years: “I said, our company is high-tech. We’re innovative. We need new energy to lead us every decade.”
Ram Charan, longtime advisor to boards and CEOs worldwide, sees mental rigidity as a blazing sign a CEO has been in the job too long. As a CEO, he says, you know you’re in trouble when “you build your strategy and capital allocation on the basis of your existing core competencies. It’s managing through the rearview mirror while going forward.”
But let’s suppose a CEO in stage four has embraced new realities and openly reversed decisions that made sense years before. Wall Street approves. That CEO may then enter the exclusive club of stage five. Sounds wonderful—but here it’s painfully hard to identify the CEO’s peak.
The problems are almost entirely personal and emotional. During the first 10 years at the top, the CEO has probably invited all or nearly all the directors who are on the board. The company is likely performing well, so the directors get prestige and probably impressive pay. They feel grateful to the CEO and are in no mood to bring up the touchy subject of retirement. Long-tenured CEOs “get too caught up with what I call external idolization,” says George. “The problem is, they don’t know when to leave, and the boards don’t have the guts to tell them.” Charan is just as harsh: “Unless there’s a crisis, the board does nothing.”
With the board not pushing for succession, stage-five CEOs are usually in charge of their own departure. The mere thought can be wrenching. “That next chapter has many similarities to professional death,” says Hildebrand: “What will I do after? How is this going to end?” Yale School of Management professor Jeffrey Sonnenfeld, in his classic study The Hero’s Farewell: What Happens When CEOs Retire, wrote of late-career CEOs, “Their personal identities are so intertwined with their roles that retirement often represents a personal catastrophe, a void into which they are forced to step.”
It’s little wonder that too often the stage-five CEO and the board glide past the performance peak and onto the downward trend line, hoping for a turnaround. As the years go by, the accumulating damage is greater than it seems. The company’s best potential CEO successors get tired of waiting and go elsewhere—a strong signal of an outdated CEO. In addition, a 20-year study of U.S. CEOs shows that a long-tenured CEO’s successor usually performs poorly. Researchers from the University of Sussex in the U.K., the Hanken School of Economics in Finland, and Lund University in Sweden find that under the hapless successor, a company’s “performance and stock returns are significantly lower, restructuring costs are higher, ‘big baths’ are larger, and firm recovery is slower.”
When very long-tenured CEOs (15 years or more) finally leave, chances are good they stayed too long. But no one could have known for sure; along the way there was always hope. In making this decision there are no certainties, only tough calls.
The 5 stages of leadership
The path from enthusiasm to excellence takes around a decade—and after year 14 things usually start to go south. Source: Spencer Stuart
Stage one
Generally a honeymoon for the new CEO. Optimism abounds. The stock often rises, sometimes too much.
Stage two
Expectations swing back toward reality. A surprise challenge sometimes tests the new CEO—an opportunity if handled well.
Stage three
CEOs who recover from stage two emerge stronger and more confident. Those who haven’t recovered are under increasing pressure.
Stage four
CEOs risk complacency, lowered ambition, and ho-hum performance. To excel, they must summon the energy to question the status quo.
Stage five
The few CEOs who continue past stage four have built a foundation for excellent performance lasting at least a few more years.
This article appears in the June/July 2024 issue of Fortune with the headline, "How to know when it’s time for your CEO to go."
