When It’s Time for the CEO to Go

At a directors’ meeting of a specialty appliance firm I was advising a few years ago, the agenda featured the selection committee’s report presented by Stefan, chairman and CEO. The board members had expected to get a list of the candidates to succeed Stefan, who was past retirement age. However, Stefan informed the board that, despite an extensive search, the selection committee had determined that no candidate was yet qualified: the three insiders needed at least four to six years’ seasoning, while the outsiders (in spite of their outstanding track records) lacked the kind of expertise that would fit the future needs of the company.

After a short discussion, the board agreed that Stefan should postpone his retirement for another four years. Yet several directors remained troubled. Something wasn’t quite right. Were there really no competent external candidates out there? And why did no one in the company qualify? What had happened to the leadership development pipeline all these years? As the company seemed to be on a holding pattern for the past two years, wasn’t it time to bring in somebody new? But was it also possible that the members of the selection committee, knowing Stefan’s attachment to his job, were in reluctant to confront him about succession?

How long should a CEO stay in his job?   The most common response I usually have from CEOs is seven years, plus or minus two. It’s a reasonable number: seven years is probably the period of maximum effectiveness for most people in what can be a very stressful job.   I think also that the nature and challenges of the job evolve over time, going through three distinct phases:

• Entry: This is the “honeymoon period”, the one time that a CEO has an open playing field. Most likely, it’s the period when he or she is most willing to learn, experiment, and innovate. It is also the point at which a CEO is prepared to take risks and make major changes, particularly if brought in as an outsider.  During this time the CEO is unlikely to perform at full potential. This is to be expected: many new things have to be assimilated: she has to gain control over a new environment, get to know her various constituencies, and select key lieutenants, the people who will help make it happen. She may also have to “kill” wounded princes, executives who had hoped to get her job.
• Consolidation: After a new CEO has established what his or her leadership is all about, in terms of direction, strategy and style, the second phase, the period of consolidation sets in.  If everything has gone well, he will start to see the fruits of all his work in the honeymoon phase. He has alliances with key stakeholders and top executives are committed to the course he has chosen. He has a good working relationship with the board. He delivers good results and is secure in his role.   The traps here, of course, are complacency and rigidity; as they approach the end of this phase, some CEOs start to resist even minor changes.
• Decline:  You know that a CEO has reached this stage in the cycle when the company has few or no new products planned for the near future and there are no initiatives to find new markets. Furthermore, there is no new blood coming into the top ranks of organization. Everyone sings to the CEO’s same old tune. The company is probably accumulating a lot of cash because top executives are running out of ideas about how to use it.  It’s during this phase that a CEO starts having problems. He may have stopped listening to other people’s ideas.   The job has become routine.  Performance is slipping.  In a fast paced industry, the problems tend to become apparent quickly; declining CEOs in a relatively stable environment can get away with it for longer.

So what is to be done when a CEO starts to decline?  The best scenario, of course, is if that the CEO himself realizes what is happening, acknowledges his increasing ineffectiveness, and looks for new horizons when the going is still good.  Ideally, that is at the point when they are at that sweet spot of being at the peak of their performance, just before the decline.
But many CEOs find it very hard to admit that the time has come to pass on the baton.

 Paradoxically, this reluctance doesn’t mean they stay closely involved; many actually distance themselves from day-to-day operations.   The reason is that because the day-to-day job has become routine, they look elsewhere for mental stimulation.

As long as they stick to safe pursuits (social, environmental or artistic causes, say), this is OK, maybe even reinvigorating.  The danger is that they may instead look for stimulation by involving the company in risky new ventures — typically a big acquisition. This offers a quick and emotionally gratifying solution to the company’s operational inertia (that they’re often aware of) as well as their own sense of inner unrest, anxiety, and boredom.  Deals are exciting, they impress the CEO’s peers, and they allow the CEO to pretend that he’s addressing the company’s growing problems.

It’s precisely at this stage that the board needs to step up.   If the CEO was an exceptional performer during the honeymoon and consolidation stage, this is unlikely to happen; human instinct is to trust the track record.  Over time, the CEO may even have filled the board with people indebted to him or her, who do not really take their review function very seriously. The result is that the board takes action only when things become really catastrophic — by which time it is often too late.

Leadership programs can also provide a form of stock taking. Through reflection — studying  “the leader within” — the CEO can increase his self-awareness and by working in a group he can exchange ideas with peers in similar situations.   Quite often, leaders who engage in this discover that they do in fact want to step down and find another job in a new environment.   Other CEOs take on a role as mentor or leadership coach to younger executives, which is a highly effective way of maintaining continuity in the organization and also helps to reduce the CEO’s anxiety about leaving.

In Stefan’s case, his reluctance and the board’s to contemplate change meant that it was eventually forced on them.  A well-known activist shareholder bought a sizable stake in the company and laid out the case for major change in the financial press. It didn’t take long before he was given a seat on the board.  With the help of fellow shareholders, he pressured the directors to push Stefan aside and appoint a new CEO.

Manfred F. R. Kets de Vries

Manfred F.R. Kets de Vries is the Distinguished Professor of Leadership Development and Organizational Change at INSEAD in France, Singapore, and Abu Dhabi. His most recent book is The Hedgehog Effect: The Secrets of Building High Performance Teams (Wiley, 2011).