By Per-Ola Karlsson, Martha Turner, and Peter Gassmann
It’s no secret that life at the top of the corporate world is becoming more challenging. Last year, nearly 17.5 percent of the CEOs of the world’s largest 2,500 companies left their posts — representing the highest rate of departures that PwC’s Strategy& CEO Success study has tallied in its existence. In 2000, a CEO could expect to remain in office for eight or more years, on average. Over the last decade, however, average CEO tenure has been only five years.
And yet a substantial subset of CEOs manages to run the equivalent of a corporate marathon, lasting nearly three times as long as the average boss. Even as the life of CEO becomes nasty, brutish, and short, 19 percent of all CEOs manage to remain at the top for 10 or more years, with a median tenure of 14 years. Some of these long-distance runners, typically company founders or visionaries who transformed their organizations, serve for 20 years, and in some cases for many years longer. All of them have had impressive runs atop their company and created a legacy.
But what happens when the baton is passed to the next runner? Sometimes things go great when a long-serving CEO departs. When Apple’s legendary founder Steve Jobs stepped down eight years ago for health reasons and Tim Cook ascended to the top job, it was hard to see how he could fill Jobs’ colossal shoes — even though Cook had been an effective chief operating officer and was the clear heir apparent. But Cook has done well: annualised total shareholder returns since he took over in August 2011 averaged an impressive 20.9 percent through 2018.
Sometimes, however, the transition winds up in disaster. When Jeffrey Immelt departed after a 17-year tenure atop General Electric in 2017, his successor, long-time GE executive John Flannery, launched a major transformation to turn around the troubled conglomerate. The plan quickly went awry amid disappointing financial results and negative disclosures; 14 months into Flannery’s tenure, he was dismissed by the board and replaced by Larry Culp, the former chief executive of Danaher and the first outsider recruited as CEO in GE’s 126-year history.
To be sure, most departures of long-serving chief executive officers are less dramatic or fraught. The vast majority of long-serving CEOs leave office in a planned succession and are followed by a company insider. Most transitions go smoothly, as was the case at Starbucks, where founder and long-term CEO Howard Schultz was succeeded in 2017 by Kevin Johnson, the former president and chief operating officer, or at Vanguard, where Bill McNabb resigned in 2018 after 10 years at the top and was succeeded by chief investment officer Tim Buckley.
In other cases, the transition signals a change in direction: At Daimler, for example, Dieter Zetsche departed two years ahead of schedule in 2018 after a 13-year run as head of the automaker. He was succeeded by Ola Källenius, the head of R&D, whose background is in innovation, mobility, and digital change.
The experiences surrounding long-serving CEOs were a focus of this year’s CEO Success study by Strategy&, PwC’s strategy consulting business, which examined all turnovers of chief executives at the world’s 2,500 largest publicly traded companies from 2004 to 2018. When we isolated the data from 2018 successions, we found it was a turbulent year, as the percentage of CEO turnovers rose to a record high.
As one would expect, long-serving CEOs generally deliver higher shareholder returns than shorter-serving CEOs, though their performance, on average, tends to be good rather than great. They typically play a key role in arranging a smooth succession to a carefully chosen insider executive at their company. CEOs at North American companies are much more likely to be long-serving than those in other regions, and they are also much more likely to hold the joint titles of CEO and board chair at the time of their departure. Overall, this trend toward outgoing CEOs holding joint titles in North America has been rising, from 31 percent in 2014 to 48 percent in 2018, compared with an average of 23 percent for other regions. The trend is even more pronounced for long-serving CEOs.
Successors to long-serving CEOs, however, face a difficult path. Following a legend is not for the faint of heart. Although they often have much in common with their predecessors in terms of their backgrounds, successors turn in significantly worse financial performance, generally have shorter tenures, and are much more likely to be forced out rather than to depart via a planned succession.
Let’s consider the questions that the boards of directors at companies with long-serving CEOs should be asking themselves: Given the long odds that successors face, how can the board best provide support? Is there a case to be made for boards to be more open to hiring outsiders to replace a legendary CEO, despite a decades-long trend favouring insider candidates?
Settling in to the C-suite
Long-serving CEOs are most common at North American companies by a significant margin. Over the full period, 30 percent of the CEOs in North America were long-serving, compared with 19 percent for Europe, 10 percent for the BRI countries (Brazil, Russia, and India), 9 percent for Japan, and only 7 percent in China. In fact, over the last 15 years, CEOs in North America were 122 percent more likely to be long-serving than CEOs in the rest of the world.
Several factors may explain these regional differences. Typically, long-serving CEOs earn their tenure — that is to say, those who stay in their positions for long periods do so because their companies are performing well and thus are given a certain amount of deference by their boards. But in Japan, where societal norms favour earlier retirement than is the case in most other countries, CEOs typically assume office later in their career and serve for only a few years, moving on to become the board chair as a younger executive succeeds them.
In China, where the corporate governance model is of more recent vintage, the government sometimes shuffles CEOs within or between industries, and there is generally more change in industries than is true in more mature regions, with some companies rising or falling fast or being sold as the markets and the regulatory
But the main reason for the long tenure of these CEOs is that they generally outperform their shorter-serving peers. The median regionally adjusted annual increases in total shareholder return (TSR) for long-serving CEOs was 5.7 percent over the 2004–18 period — 3.3 percentage points higher than for other CEOs. Moreover, 59 percent of the long-serving CEOs were in the two upper quartiles of TSR performance, compared with only 47 percent of non-long-serving CEOs. And only 8 percent of the long-serving CEOs were in the bottom performance quartile, compared with 28 percent for shorter-serving CEOs. Over the last three years, the performance of long-serving CEOs has improved even more, with 64 percent in the top two quartiles, and a mere 7 percent in the bottom quartile. This suggests that boards of directors have gotten stricter about allowing CEOs to continue long tenures unless the performance is notably positive.
The successor’s tough road
The challenge faced by successors of long-serving CEOs comes into sharp focus when we zoom in on the smaller number of companies at which, between 2004 and 2018, a long-serving CEO departed and his or her successor also finished his or her tenure. We excluded interim CEOs and transitions that resulted from Mergers & Acquisitions from this group because such events are often unique, and the performance following the transaction is driven by many factors, not least the economics involved in the transaction itself. This leaves a subset of 284 companies among which we can make a direct comparison between the performance of the long-serving CEO and his or her successor over their full respective tenures. One reason for the small size of this data set, naturally, is that some long-serving CEOs have left their position only recently, and their successor is still in place.
Among this subset of companies, the median successor’s annualised TSR was a sobering 4.0 percentage points lower than that of the replaced long-serving CEO. Comparing the performance of the two groups of CEOs by looking at the TSR performance quartile in which they fall provides further insights. The long-serving CEOs largely performed better (56 percent were in the top two quartiles) than their successors (only 37 percent of whom were in the top two quartiles). Worse, 31 percent of the successors were in the bottom TSR quartile, compared with only 10 percent of their long-serving predecessors.
Close to half of the successors who replaced long-serving CEOs moved the company’s TSR down by one or more quartiles (see “Compare and contrast”). Only 24 percent moved it up to a higher quartile, and 27 percent saw the TSR hold steady. The performance change pre- and post-succession was even more pronounced when the long-serving CEO was a top performer. In cases in which the outgoing CEO was in the top performance quartile, 69 percent of the successors ended up in the bottom two TSR quartiles.
Moreover, the longer the long-serving CEO’s tenure, the worse the successor performed. Among successors who replaced a CEO with a tenure of 10 to 15 years, 42 percent had a TSR in the top two quartiles, compared with 35 percent for those following a CEO with a 15- to 20-year tenure, and 25 percent for those following a CEO with a tenure of 20 or more years.
Not surprisingly, the median tenure of the successors to long-serving CEOs is far shorter than those of the leaders they replace (5.3 years versus 13.7 years), and they are significantly more likely to be forced out than their predecessor (35 percent versus 19 percent).
Implications for boards and successors
For board members, oversight of a long-serving CEO can be tricky. On the one hand, it’s difficult to make a change when the CEO has performed well over a long period, and there’s much to be said for continuity and predictability. On the other hand, virtually everyone grows stale at some point, and can easily become locked into a certain frame of mind. Given the rapid pace of change inspired by digital technologies, long-serving CEOs are likely dealing with a context that is significantly different from the one they are accustomed to. In addition, some of the best possible successors within the senior executive ranks may not be willing to hang around indefinitely. They may themselves become impatient and leave, or be poached by another company.
Board members should think carefully about the right time to shift from a long-serving CEO to a new candidate — especially in cases in which the incumbent CEO’s performance is average, or even good but not great. New blood brings energy and perhaps a new perspective on how to drive the business. Boards of North American companies should be especially wary.
Our data, as noted earlier, shows that it is much harder for the successor to flourish following a long-serving predecessor, and the longer the predecessor’s tenure, the more challenging it is for the successor to perform. Boards have to take care not to become complacent. Term limits, mandatory retirement ages, or other mechanisms aimed at limiting CEO tenure are not a panacea. Boards have to continuously evaluate whether the person sitting in the company’s top slot is up to the task as conditions change.
Boards need to acknowledge that statistically speaking, successors to long-serving CEOs start with the deck stacked against them. As a result, the board needs to make clear that the new CEO has their support, and that they are not constraining the successor as he or she is thinking through a plan for the company’s future. This issue can be particularly dicey when the outgoing CEO is also the board chair: The rest of the board should be wary of the chair continuing to run the company and impeding the successor.
As well, boards should be generally mindful of the merits of separating the roles of chief executive and board chair. Although we lack evidence that one performs better than the other on average, many governance experts agree that separate roles are the best practice, and governance standards have moved in that direction in many regions. We do know that combining the roles increases the risk of ethical lapses. In our 2017 study, we found that among CEOs who were forced out, 24 percent of those with joint titles were dismissed for ethical lapses, compared with 17 percent of those with the CEO title only.
Boards should also consider whether the best candidate to succeed a long-serving CEO may be an outsider rather than an insider. In five of the last six years, when we examined the performance of departing CEOs, those who had come in as outsiders outperformed insiders. One hypothesis for this differential is that in the current climate of disruption, technological advances, and changing competitive dynamics, the most effective candidates may be those whose backgrounds, perspectives, and skill sets are different from those possessed by the in-house candidates.
For executives who may be in line to succeed a long-serving CEO, all the standard advice for new CEOs applies. Calling upon our experience in the trenches with top management across a variety of sectors, and our previous annual surveys exploring CEO Success, we’ve identified several game-changing practices that will substantially contribute to success for new CEOs. They are especially useful for those who fit the typical profile of the successor to a long-serving CEO — namely, an executive who came up from inside who has deep knowledge of the company but no prior CEO experience, who does not hold the concurrent position of board chair, who has no COO, and who faces high board expectations.(