The average tenure of CEOs in Uganda is about 5 to 7 years. For private firms, this has been reducing further, with CEOs now lasting between 3 to 4 years. Although, many always thought this did solve the agency problem. One of the arguments was that when a CEO’s time was capped, so were their faults, mistakes and everything that could have gone wrong in their tenure. That in 3 years, there was not that much damage for a company not to recover from.
Today, we argue on the opposite side that this has led to a massive destruction of company value. The thought process that resulted in short CEO lifespans in organizations has resulted in the worst incentives. All systems are about incentives, and if the incentives are not aligned, it produces different outcomes.
Right from CEO selection, because organizations knew they could always have a new CEO within 3 years, it also meant that there was never enough scrutiny. CEO selections were rushed. Also, more gambles were taken by boards and other hiring bodies when it came to CEOs. Newbies, untested CEOs, CEOs without any grounding could be thrown into the deep end. It was the case of ‘let’s play the wild card’, it may produce some outstanding results. Indeed, some wild cards delivered phenomenally, but in most of the cases, it was such wild cards that started companies on their downfall path.
We believe that if you cannot entrust someone with a company for more than a decade, you shouldn’t entrust them with the company for even a day. Hiring a ‘bad’ CEO for the sake of filling the position until you find a great alternative is not a clever strategy, it’s disastrous. The market will always punish such companies that make these kinds of reckless decisions.
You have hired a CEO for only 2 to 3 years, it means they have such a short time to impress. Thus, they are going to look for all possible short cuts to deliver the results the boards long for. This short-term outlook is also what resulted in creative accounting as CEOs were looking for big hits in their short tenures. We have seen growth numbers reported in books without the same being reflected on ground, or in more powerful brands. CEOs have also picked up pet projects in the same that they should have something to their name before they leave. Thus, CEOs are justifying all kinds of innovations even though such will not work in the market. The beauty with these short life spans is that they next CEO is the one to suffer with the bad decisions of the previous CEO.
Thus, if a CEO is hired for a short time, and they have a long-term view to things, their successor will enjoy the results of their great decisions. Their successor will be credited for success in which they played little or no part. The absence of long-term tenures has also destroyed a key competitive advantage, company culture. CEOs have different outlooks to how people should be managed. Every CEO comes in with their own people, and way of thinking. Although the architects of short-term spans thought companies would end up reinventing themselves, bring in new schools of thought, that has worked to the contrary.
Thus, the people in the organization have become great at studying every new CEO that comes in, aligning to what such a CEO wants to hear, and formulating everything to match that. If a CEO is more obsessed about distribution, every company presentation will now have an aspect of distribution. Do the people believe that? No, but for their job security, they will align their thinking to what’s trending. And what’s trending is whatever the new CEO is biased towards.
We are arguing for a new approach to top leadership. Organizations that frequently change CEOs do not fundamentally become more innovative. Whereas they seem to declare more profits (often times, these profits are a result of machinations, and creativity in the books). We believe even though a CEO is hired to serve for 3 years or less, they should be hired in such a way that they have the ability to run the company for over a decade. If you can’t trust someone over the long-term, you shouldn’t trust someone over the short term. If companies are looking to creating organizations for the future, with staying power, with impressive moats and competitive advantage, these short life spans should be rethought. It helps neither the CEO nor the company. More value continues to be destroyed with every new CEO. There’s a better way to run companies, and good old way has not gone out of style. Focus on finding the right CEO and entrust them with time to radically transform the organization. Pick the right card, and let it play the long-term game.
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