Hildebrand, Stark

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The Life Cycle of a CEO— Claudius A. Hildebrand & Robert J. Stark

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Introduction

In fact, Dave hadn’t been the first choice for the CEO position, or even the second or third choice. Word was five others had been offered the job before him. What’s more, a couple of years earlier he’d been unceremoniously fired from his position as divisional president at a leading competitor. No one would have suggested from his educational background, either, that he was CEO material. Not only did he not have a degree from an elite school, but it also took him six years to graduate. He hated college and he’d dropped out for a time.

As Dave’s first year in the CEO seat progressed, the sneering assessments of that Florida night prevailed on the Street; the company’s stock slid 40 percent.

Dave is Dave Cote, who at the helm of Honeywell achieved on of the most impressive company turnarounds of any CEO in the twenty-first century. In his sixteen years in the job, from 2002 to 2017, he took the company— deemed “unfixable” by one leading analyst— from the brink of disaster to a share price rise of 245 percent. That’s compared to 115 percent for the S&P 500 during the same period. As for the company he was booted from, that was General Electric. Cote was fired by legendary GE CEO Jack Welch after Welch appointed Jeffrey Immelt as his successor.

All the mythologizing is so unfortunate. It has popularized badly misguided notions about how a CEO can succeed in a job that’s not only crucial to the economic foundations of our society but also so cognitively, emotionally, and physically challenging that nearly a third of those appointed last fewer than three years in the role. The mythmaking has obscured so many important lessons we can learn from observing how CEOs struggle mightily with the changing challenges of the role. And overcome them, not only in the early going but also throughout their tenures.

Yet, Stanford economist Nicholas Bloom, who has tried for twenty years to determine the characteristics of the most effective corporate leaders, cautions, “You look at the data, there’s ten different recipes for success. Sure, there are some people who are better than others, but it’s damn hard to tell what it is.

But the more significant influence has been on the increased use of data analytics to change how baseball and other sports are being played and how players are being trained and coached. In baseball, for example, starting pitchers now pitch fewer innings because statistics revealed that relief pitchers are more likely to get batters out after their third time at bat. Detailed maps of where players have hit the ball are used for “shifting,” repositioning fielders often dramatically to the left or to the right, closer up or farther out, when a particular batter steps up to the plate.

Similarly, the CEO Life Cycle will help leaders play a better game by anticipating the evolving challenges of the CEO job and preparing for them. It will help CEOs recognize when they are heading into a new stage of their tenure and stay vigilant about avoiding common pitfalls made in that stage. Additionally, it will help them stay on the offense, proactively engaging in new learning and personal growth, ahead of the curve, as they progress through the stages. The findings can also help boards anticipate issues CEOs may face and engage with CEOs more vigorously to provide support at critical junctures.

For CEOs in the Launch stage, practicing the arts of observation and listening is crucial.

Crucial in the Launch stage is to rigorously scrutinize whether any playbooks you may have found effective in the past should be applied in making first moves or cast aside. Joe Hogan advised, “Throw out the playbook filled with actions and instead bring one full of questions.” Leaning hard on past experiences may be setting yourself up for failure.

CEOs often get swept up in a powerful “honeymoon” tailwind of optimism during this phase. Not only is the board of directors flush with confidence in their choice, but so are the markets. New leaders also commonly inherit an array of low-hanging-fruit problems to solve that their predecessor, no matter how successful, neglected dealing with or expressly put off; the market generally anticipates these quick solutions and their existence can drive up the share price. Yet the intensity of the daily demands and the huge learning curve tend to make new CEOs doubt that they’re getting this vote of confidence.

Strong management of board and shareholder expectations and perceptions is critical. Indeed, often the core problem is the perception of performance, which makes powerful and highly persuasive communication with the board, shareholders, and analysts a CEO’s priority. One director told us, “Even when you think you’re communicating too much, you’re probably not communicating enough.

Confirmation bias may lead to seeing current difficulties in the guise of past experience, which can encourage a CEO to dig in on a flawed course of action. Our research shows that a higher proportion of repeat CEOs compared with first-timers were ousted in this stage, by almost double, possibly demonstrating their overreliance on past experience.

For two out of three CEOs in our database, performance was lower in their years six to ten than it was in years one to five. Some gave up their gains of the first five years altogether. Results may not actually dive into negative territory, but if they do, they vacillate up and down around a mean, which only reinforces the sense that one can let up on the gas.

The danger is exacerbated when boards also become less energetic in pushing for vigorous changes in strategy or operations. As director Ann Hanley shared, “It’s easy to get into incremental mode.” A CEOs internal team may resist a continuous quick pace of change.

1. Ascent

Optimally, preparation for the way up involves seeking out wide-ranging roles that will stretch you, roles that often extend well outside your comfort zone but that provide broad experience and allow you to develop a whole-enterprise systems perspective of how companies operate. Preparation also entails hard inner work, pushing yourself to address any weaknesses in your leadership skills. Particularly challenging is the transitioning from a leader who relies mostly on directive, command-and-control style of leadership, which may have produced great results in prior positions, to a collaborative influencer who delegates authority and understands how to lead through inspiration and empowerment. Companies have become too complex for CEOs to lead with the traditional command-and-control style. Leaders who are most successful in harnessing their firm’s talents and organizational capabilities understand that companies are complex, adaptive systems, which they cannot fully control. They realize they must lead their company’s growth using the force and clarity of the vision and strategy they articulate and their abilities to energize, galvanize, and enable people.

Many of the most successful CEOs we studied, such as Microsoft’s Satya Nadella, worked their whole career in one industry. Many also worked at one company for most of their career, as was also true for Nadella: he joined Microsoft after two years in his first job as an engineer for Sun Microsystems. GM CEO Mary Barra, who achieved the breakthrough feat of becoming the first woman appointed to lead one of the Big Three US car manufacturers, worked only at General Motors over the course of thirty-three years before her leap to CEO in 2013. She started working for GM, inspecting hoods and fenders at a Pontiac factory, even before she graduated from college. And she earned her undergraduate degree in electrical engineering from General Motors Institute (which later became Kettering University).

We conducted a study that corroborated the importance of leading through influence. We examined individual assessments of the leadership capabilities of 235 candidates in 75 CEO succession processes that were conducted over the course of a decade. We then focused on the 47 CEOs selected out of that pool to lead public companies, which meant good data was available on company performance. Next, we examined correlations between leadership skills and company performance, as measured by shareholder return, operating margins, and revenue growth. This data was complemented by in-depth interviews with CEOs and candidates about their approach to leadership. Analysis of how different leadership styles matched with performance showed that the highest performers were the most accomplished in influencing through empowerment. This is not to say that the directive style of leadership is never appropriate. Some situations call for it, for example, crisis management. But, generally, the best results come from leading through empowering others.

As Damien Faughnan said, the most successful CEOs are “the people who really work to understand who they are” and who have a great “capacity for deep reflection about themselves.” Failing to embrace this discipline of self-interrogation and relentless people skills development is a leading cause of executives stalling in their careers or failing in the early years of their CEO tenure.

Shantanu Narayen, CEO of Adobe, exemplifies the influencer style of leadership. He recalled that when he stepped into the CEO position at Adobe, “I quickly realized there was no direct control, it was all influence.” He described how he worked intensively on developing his people leadership skills.

As he put it, he had to learn to become skilled at flag painting in addition to road building. What he means by “flag painting” is articulating in a vivid and concise way the mission he wanted his team to advance.

This involved really pushing himself to boil down his vision for the company’s guiding mission into highly persuasive and memorable words, such as creative collaboration and accelerating document productivity. “I obsess over that,” he said, stressing the importance of “learning the power of the written word, because if you get that right, your message will flow off the tongue, you’ll use it with passion.” Then, he emphasized, people will be inspired to rise to the occasion and interpret the guidance as best suits the products or services they’re working on.

So open to ideas is Narayen, in fact, that when Shrivastava and team members visited Adobe headquarters some months later and “decided to park ourselves in the pantry next to Shantanu’s office,” hoping to grab his unscheduled attention, Narayen allowed them to present a quick product demonstration. He greenlighted work on the project, and when they presented the finished version to Narayen at the next annual sales conference, he exclaimed, “What you guys have built has blown me away!” In 2015, the product, called Adobe Captivate Prime, was successfully launched.

Building on our study findings that CEOs who lead through influence were the most effective, we followed up by conducting interviews to learn about the development advice and training these leaders had received. We asked leaders to describe how they made the journey to becoming the highly effective leaders they were. What emerged is that a leader’s evolution generally proceeds in iterative cycles, with steps forward often followed by backsliding into old habits and then a renewed effort at change. It’s a process of trial and error, and often of fits and starts, as the daily grind of immediate demands diverts attention from one’s inner work. Those who continue to progress in the journey typically go through a three-phase cycle.

First, they are confronted with a necessity for change either because they took on a new challenge that reveals the shortfalls in their leadership or through feedback from their higher-up, colleagues, or mentor.

Once leaders realize the necessity of change, they can begin to explore the possibilities of change. The second phase involves considerable discomfort and a good deal of frustration because new skills take more work to build than anticipated. Falling back into old habits is common, especially when dealing with high-pressure situations. Backsliding should be expected and not taken as an indication of failure. Progress unfolds through an iterative process of steps forward, lapses backward, and then steps forward again.

With perseverance, positive reinforcement kicks in, which provides sustaining fuel for continued effort through the third phase of leader evolution.

Our research shows that from 2000 to 2020, approximately 77 percent of CEOs were appointed from one of these positions: chief operating officer (COO), which is frequently combined with the president’s title, accounted for the lion’s share of appointments, at 50 percent; divisional chief executive officer (DCEO) came in at 19 percent; and chief financial officer (CFO) accounted for 8 percent of appointments. Another 13 percent of appointments were of experienced CEOs. Leapfrog appointments accounted for only about 5 percent, with the remaining percentage including appointments from comparatively new C-suite roles, most commonly chief technology officer, which unsurprisingly were concentrated in technology firms.

Results show that the boards’ priorities have been on target: DCEO appointments had 10 percent better odds than COOs of being among the top-quintile performers.

As for former CFOs, analysis shows that, although they often get off to a very strong start, their performance tends to lag beginning in their third year. For the full course of their tenure, they accounted for the smallest share of top performers, at just 8 percent. They also accounted for the highest percentage of bottom-quintile performers. In examining their performance according to measures in addition to TSR, including revenue growth, return on invested capital, and profitability, we found that their strong early performance is largely due to their experience with finding efficiencies. This often leads them to continue to focus heavily on driving growth in profitability by taking cost out of the business and shoring up the company’s balance sheet. The market generally rewards them in the first two to three years for those achievements. But over time, the emphasis on holding down costs versus driving revenue growth through product, marketing, and sales innovation, and revenue performance, which few CFOs have experience in, impedes growth.

Up until this point, you likely have benefitted from stretch roles, along with periodic leadership development training to address capabilities needed below the CEO level. In fact, we find that leaders who make it to the C-suite get less development support than they did before reaching this level.

Most successful leaders not only are receptive to critiques of their abilities and management style but also proactively seek feedback. In fact, executive coaches Marshall Goldsmith and Howard Morgan found that was the distinguishing factor for success in a study of more than ten thousand managers’ personal development tracks: sharing your growth goals with people you then ask to provide feedback on your progress was the only factor that differentiated successful self-development approaches from unsuccessful ones. In addition to formal evaluation processes, successful leaders seek informal input from both higher-ups and direct reports.

But if you really dig in and discipline yourself to be receptive, you can become highly skilled at making others feel comfortable providing criticism. Hubert Joly, who led a remarkable turnaround as CEO of Best Buy, shared his own journey in learning how to make productive use of feedback. Before joining Best Buy, while CEO at CWT (formally Carlson Wagonlit Travel), Joly began working with the executive coach Marshall Goldsmith. “Up until then,” he recalled, “I was a perfectionist and mightily struggled with feedback. Whenever a negative point was made in a ‘360,’ I would ask, ‘Who said that?’ Marshall helped me change my perspective.

When we create development plans with leaders in launchpad positions, we break down areas for development into four core categories: strategic vision, mobilizing team and organization, stakeholder engagement, and self-development. Your current position provides you with good development in some of these areas, but not in others. CFOs, for example, obtain good experience with strategy and with board relations, whereas COOs generally do not. Clearly, your plans should focus on the types of experience your current role is not helping you with.

CFOs will particularly benefit from developing these skills:

• Broadening understanding of the entire stakeholder landscape. CFOs already have a strong understanding of the analyst community, such as by participating in earning calls that address investor concerns. But they should learn about key suppliers, plant operations, and customers about whom they may know little.

• Devoting time to assessing opportunities and challenges concerning longer-term top-line growth beyond quarterly and annual results and taking tolerable risks to drive innovation for the future of the company

• Seeking ways to lead at scale and through others to broaden their background working with a smaller functional team

• Taking a structured and systematic approach to talent management and coaching to help team members address gaps and leverage strengths

2. Launch

Indeed, in a recent global survey of 422 CEOs, 68 percent shared that they believed they hadn’t been fully prepared for the role. They believed they had the required strategy and operations skills, but the gap in their preparation lay in what they discovered is unique to the CEO role: how unexpectedly emotionally challenging it is and the great intellectual agility it requires. They had underestimated how different the job is from any other leadership role they’d had in ways that are profoundly disorienting in the early days.

The inside demands of the role tend to dominate discussions in succession planning and interviews for the job. But management guru Peter Drucker wrote, “To define the meaningful Outside of the organization is the CEO’s first task,” and cautioned that “the definition is anything but easy, let alone obvious.” Although it may be clear that regulators and government officials are key stakeholders, politics that demand the CEO’s attention may bubble up unexpectedly from the full landscape of public issues.

Prior board experience can also be a great accelerator for incoming CEOs in developing relationships with their directors.

But these pulls on time can be siren calls, treacherous in their allure and taking too much time away from core responsibilities. Richard Anderson, former Delta and Amtrak CEO, warned that leaders can “easily go spend 20 to 25 percent of time on extracurriculars,” if they’re not vigilant. The cost versus benefits of these commitments must be weighed carefully. In the Launch stage, with such a press of competing priorities, setting strict limits is vital.

As Piyush Gupta reflected, “As CEO, you never get told the full truth. Everybody puts a spin on information by the time it comes to you.

Yet CEOs can't just demand that board members engage more closely with them. “You have to lead the board,” Piyush Gupta said, “and persuade them of the direction you want to take the company, but at the same time, they are the bosses. It’s not straightforward.” Further complicating the relationship is that the CEO generally does not know who on the board supported them for the job and who did not.

The key takeaway: experiencing some fear and self-doubt along with the thrill of taking charge is not only perfectly normal but also a feature of success. It’s a sign that you’re your keeping a critical perspective about how well you’re doing, which is crucial in embracing the need for continuing development.

Alternating between internal and external demands is only one way CEOs must learn to divide their time and energy. They also have to focus on the urgent here and now and on longer-term plans. In addition, they must be in command of the “hard stuff” of numbers and devote considerable time to the “soft stuff” of people management. Also crucial is striking a balance between taking decisive charge by quickly making some moves and engaging in learning more about the company. All require both/and thinking rather than either/or thinking. As skilled as leaders may have become in this over the course of their careers, the challenges of the Launch stage greatly up the ante on getting the balance right. Carol Tomé pulled off this balancing act with aplomb.

More evidence of a lift from exuberance during the Launch stage is that the lift in the stock price is often followed by a sophomore slump. Of those CEOs who enjoyed a honeymoon period, 73 percent realized lower results in their second year. The CEOs caught in such a downdraft on average relinquished 21 percent of TSR. For Paz, the share price slid 14.56 percent, despite the fact that no significant problems arose to trigger concerns. Also, market growth overall was strong that year, with the S&P 500 rising 12.34 percent.

Practicing sober selling from the beginning of your tenure will stand you in good stead if a honeymoon lift gives way to a slump. The market will always make its own judgements. But if you’ve noted possible headwinds before they are widely apparent, your credibility will grow all the stronger.

The other key takeaway about honeymoon enthusiasm is the importance of being wary about tailwinds of support that may be short-lived. Working intensively in your first year to build a strong foundation of trust with the board and key stakeholders inside and outside of the company is vital. A good first step is demonstrating that you know you have a great deal to learn.

There are going to be surprises no matter how well you know a company. Learning about them early is challenging because employees, even at the highest levels, are reluctant to share troubling information. Learning what you need to know requires rigorous questioning while conveying in a compelling way that you absolutely want people to speak openly.

A CEO coming in from the outside needs to emphasize getting a good fix on the full range of business operations, the strengths and weaknesses of the leadership team, and the nature of the culture.

Chris Nassetta, when appointed to the helm of Hilton Hotels in 2007, made vital discoveries by travelling to a large number of hotels to talk with employees. The company had just been purchased in a high-stakes leveraged buyout by Blackstone for $26 billion, one of the largest LBO deals ever. For his first three months, Nassetta travelled to Hiltons in the United States and abroad, talking to workers on the front lines, such as bellhops and cooks, in addition to hotel managers, and questioning customers. He discovered that, as he put it, “the culture was a wreck.” Among many problems, the company’s standards for service were subpar. To kick-start rapid improvement, he instituted a requirement that every company manager spend three days working in a hotel, at the front desk or in the kitchen and doing housekeeping. He also implemented an employee evaluation process, emphasizing quality of customer service provided. Those were early steps in a many-years-long process of creating a culture of excellence, which, as we detail in Chapter 7, drove a remarkable turnaround in Hilton’s fortunes that made the LBO one of the most successful in history.

Questioning so many people early on is also a powerful way to convey respect for people’s knowledge, showing them, not just telling them, that you respect them. It also harnesses the enormous power of demonstrating humility. Mark Hoplamazian, who took the helm at Hyatt Hotels Corporation in 2006, credits his great success to fulsomely owning up to his ignorance and asking for help in understanding the business. When he took over at Hyatt, “My experience was within finance: I did not have a lot of managerial experience. On paper, I was seemingly unqualified for the role.

One important benefit of outreach work is that it makes all the hard work more meaningful. It makes the impact of your moves on the daily lives of so many people palpable. “My most powerful motivator,” said Enbridge CEO Greg Ebel, “was the five times a year being in the field for several days, if not a week, of going around to different locations and meeting with rank-and-file employees. You feel the awesome responsibility you have. I would tell myself, I cannot screw it up for these people. Each one of them is building their own castle, whatever that is, whether it’s a playhouse in the backyard for their kid or a brand-new car.

Ebel’s routine of five annual field visits speaks to how important it is to do this deep and broad discovery work not only in the early days but also throughout your tenure. The time has proven so valuable that many leaders incorporate various listening and observing practices into their ongoing agendas. Chris Nassetta said, “I am talking to customers and our team at all levels all over the world all the time to make sure that I’m learning and understanding what’s going on inside our business.

By establishing a set of ongoing listening practices in your first year, you build trust that you’re not just putting on a show of wanting input. Over time, as people see you acting on their input, you will encourage leading by listening throughout the organization.

Building strong relationships with your board members is another top priority of a new CEO. Yes, you’ve gone through an intensive interview process with them, and they’ve just selected you. But in the words of one CEO: “You won't know if you were selected by an inch or a mile.” Some directors may disagree with your vision and plans; some may even be dead set against you, but won’t share those sentiments with you.

Boards are like a team of star performers. Directors are appointed because they’re highly accomplished. Most have been successful executives. All have a depth of leadership experience. Directors are also selected because they have expertise the company needs. They have strong views about where the company should be heading and what’s going well and what’s going wrong. They can be of enormous assistance. But they can also be agitators against the CEO. Or the CEO might have the opposite problem, a board that is far too passive, that does not engage deeply enough in company issues and strategy setting or that focuses too much on narrower governance functions of financial oversight.

Board relations is another area where the new CEO can do deep discovery work to find out how the board operates. The “social system” of each board is greatly complex. Particularly tricky are boards in which directors have been working together for many years, with some in their seats for over a decade. They’ve had many debates among themselves and disagreements about all manner of issues. They have strong opinions about the prior leadership of the company. Often a few key influencers act like a board within a board.

Doing spadework learning about directors is crucial. It’s best to start by talking with the chair or lead director because helping a CEO develop a good relationship with the board is part of their remit. Focus on getting a good read on this person. Then ask about each director and their history. What contributions have they made? What issues are particularly important to them? Which top three questions should you pose to directors? It’s important to do this discovery early on because, further down the road, it may come across as political gamesmanship rather than genuine discovery work.

Then, when you speak with the other directors, ask them to share their observations about the company through their time on the board.

Once you’re attending board meetings, you can strengthen your relationship with the group if you don’t do too much talking. Instead, prompt discussion by asking directors plenty of questions. The boardroom is one room where the temptation to prove you’re the smartest person in the room can be especially strong but especially off-putting.

Always be a step ahead in gathering and sharing bad news. As discussed in the next chapter, do that with the board and with investors, analysts, and really, all stakeholders. Your workforce will also resent being blindsided, as will community leaders regarding effects on their constituents. Dave Cote tells a powerful story of getting out ahead of bad news when he started at Honeywell in 2002. “I was hit almost immediately with a bombshell: our finance team informed me that we’d have to significantly reduce our earning commitment for the year.” He decided to lower the company’s earning projections, and then did so again within a few weeks when more information became available, even though, by his account, “analysts and investors already lacked confidence in me.” Over time, though, as he acted so forthrightly, they developed great confidence in him.

3. Calibration

Recall that our CEO Life Cycle analysis found that three out of four (73 percent) CEOs with a successful start that beat the market in year one did worse in year two. On average, the dip in TSR was a whopping 21 percent, underscoring that a slump should be taken very seriously. That said, it’s also important to keep a clear head about why share price is being battered. Often, the slide— as with the honeymoon spike— is a market overreaction. Analysts and investors often overshoot in punishing shares, mainly due to sentiment rather than the facts of performance and company initiatives being undertaken.

Although extremely clear and compelling communication about results is always imperative, it’s especially important as recalibration unfolds. Actual results are, of course, paramount in assessing performance. But the perception of those results and of whether the CEO and leadership team are on top of the situation is at least as important.

Ann Hackett advises really engaging directors in ongoing problem-solving. “A CEO should share the biggest challenges and want the board’s thinking about them.” She’s seen some make the mistake of thinking “they have to have solved everything, and they shouldn’t bring problems to the board.” But for the relationship to work optimally, “you have to be able to go to deep places and challenge one another.” You want to be doing all you can to ensure that the board is, as she put it, “a learning organism.” She recommends regularly providing them high-quality information about what the company, and the industry, is facing. Also help them “get close to the business and customers,” which a CEO can facilitate in many ways, such as by setting up factory visits or meetings with members of the management team. If you do this extra work, she advises, “then a board thinks differently about everything they’re doing. Governance becomes more strategic. Risk becomes more strategic.

We’ve found that appraising boards of our findings about the common honeymoon-to-slump pattern has also been helpful. In one instance, we were advising the board of a Fortune 50 company. The freshman-year CEO was enjoying a huge spike in share value. The board had selected her because of her long experience in executive roles in the company’s industry, and the market agreed with the board’s enthusiasm. The board was over the moon about the response. But having seen the high likelihood of a honeymoon-to-slump pattern in our modeling for this firm, we advised the board that they should expect a correction. When, sure enough, the share price dropped precipitously starting early in her year two, the board credited it to the predicted swing back from a honeymoon lift and didn’t turn up the heat on her as they might have. She’s gone on to thrive for five more years in the role, and counting.

The best models will always fail at some point. CEOs must combine information with intuition in decision-making. They must deploy informed intuition. This is not simply going with one’s gut. A good definition of informed intuition is “the process of blending existing information and data with one’s experiences, educated assumptions, and instincts to arrive at a logical conclusion.” Relying on it is always important, but it becomes even more so in the second year, as you’re moving further out from the initial assessment of your strategic agenda. Informed intuition also requires taking the people component into account. Call it the social side of strategy: marrying the people and performance components. Numbers and analysis and logic only get you so far when you are in the fog of war.

Rigorous data analytics should inform intuitive thinking. Shantanu Narayen, for example, stressed its role in his decision to move Adobe to cloud-based service. The process involved “a lot of discipline,” he said. “We ran pilot in some countries. We got feedback. People give us credit for bold decisions. But we put in a lot of work.” Yet, when asked how he evolved as a CEO, he said, “I got much more comfortable with pattern matching.” Discerning a pattern you’ve seen before in a new situation is one of the signature abilities of informed intuition. But spotting patterns, as Narayen cautioned, can be “both a plus and a minus.” Doing it well requires building up a robust mental archive of patterns seen through time. With that strong repertoire, pattern matching can be remarkably powerful. Without that archive, it can go badly awry. But even with good experience, it’s easy to fall into the trap of confirmation bias— seeing a pattern because you expect it to be there. It’s essential to rigorously challenge your intuitions.

Narayen emphasized that to ensure you’re both listening to your intuition and checking it, it’s important to create a process for combining your informed intuition with that of others, as Paz did.

Using time to gain some distance is one of four key steps in a simple but powerful decision-making framework called WRAP. In their book Decisive, Chip Heath and Dan Heath introduce this method of making decisions with informed intuition:

Widen your options.

Reality-test your assumptions.

Attain distance before deciding.

Prepare to be wrong.

Getting out of the C-suite down into the company and out into the field pays great dividends and allows you to see and hear for yourself how moves are unfolding. Frontline employees may have a very different view from what’s included in the assessments being shared with your team. All sorts of discoveries about how products and services can be improved can result. Indra Nooyi got “out in the marketplace almost every week.” She was a great anthropologist. One day, she even spent some time sitting in a car in the parking lot of a Publix store with the head of Pepsi’s American Foods division. She wanted to watch shoppers enter and exit, and her observations led her to a great insight. She made note that many elderly shoppers would stop to chat with one another. “Shopping was clearly a happy occasion for them,” she recounts. Then inside the store, she had a major realization. The Pepsi soda and Aquafina bottles were all being sold in twenty-four-pack cases. How could those elderly people load those into their cars? She subsequently sent a team of product people to the MIT AgeLab, which specializes in working with organizations to improve elders’ quality of life, such as through product engineering sensitive to their needs. The Pepsi team came back with many ideas, which they used to redesign product features, such as making twist-off drink bottles easier to open. Nooyi was brilliantly combining her intuition with expert information.

Pat Kampling of Alliant Energy cautioned, “An organization has a pace. The CEO can’t be outrunning that.” Shantanu Narayen highlighted, “You have a cadence of execution in a company.” If you’ve been with the company for some time, you may have a good understanding of that cadence. If you’ve joined from the outside, developing that knowledge is vital. And those with long experience in the organization won't have this awareness about some teams or whole divisions and must develop it.

Tritton moved with great speed. Within his first two years, he’d launched eight private-label brands and had seventy stores remodeled. He reported to analysts that they were “performing above plan.” After the first few months of the COVID pandemic when stores were closed, store traffic rebounded well, and as a COVID-fueled boom in the purchase of home goods ensued, the chain enjoyed a strong boost in sales. But, then, in the latter half of Tritton’s second year, sales declined. Although he characterized the slide as “a disruptive moment along our multiyear transformational journey,” the moment turned out to be protracted. Many factors contributed to increasingly dire results for the chain, but among them was that, as reported by the Wall Street Journal, “Mr. Tritton ushered in changes faster than the retailer could build systems to support them.

The study analyzed the fortunes of nearly four hundred CEOs appointed to the helm of S&P 500 companies within the decade of 2004 to 2014. A set of the fifteen most effective early moves was identified. And out of those, the highest performers relied most on these five: operational improvements, launching new products, improving customer relationships, increasing employee engagement, and culture change.

Those in the top quintile of performance increased company efficiency at a much faster clip in their first two years than lower performers. In fact, they cut costs at twice the pace as those in the lower performance groups. This allowed them to achieve, on average, gains of 10 percent in operating income in their first year and 20 percent in year two. Top performers also engaged, on average, in fewer acquisitions in these years, and those they did were typically smaller scale.

4. Reinvention

Lew Hay, who led NextEra Energy for eleven years, from 2001 to 2011, shared that it was only after his first few years, having successfully steered the company through some rough headwinds and built his own team, that he felt he could forcefully make the case for his strategic vision: transforming the company into a leader in production of renewable energy.

Though Hay planned from the beginning to transition the company into largely renewable production, he shared with us at the time, “The vast majority of the players in our industry thought it was a fool’s errand. There was still skepticism as to whether renewables were just a fad and government incentives would go away.” In his first few years, he focused on bringing in a team of innovative thinkers with entrepreneurial experience. “We had some of the best utility people around,” he shared, “but they were very risk averse.

He started building renewables capacity right away, but with small steps. “In the very early days,” he recalled, “I had to downplay what we were doing and say, ‘Hey, it’s kind of a nice little niche for us, and we’re making some money, but it isn’t a core element of our strategy.

We found this initiation of a big new strategy push at this year three to four juncture again and again in the journeys of the most transformative CEOs. Mary Barra took charge at GM in 2014, and in her first two years largely focused on urgent shot-term issues. She had to steer the company through the tumult of a scandal that broke just three weeks after she steeped into the job: GM had failed to disclose that ignition switches in some models were causing cars to suddenly shut off, resulting in the deaths of more than 120 people.

Hubert Joly’s timing in announcing a next-era strategy emphasized how the mindset he’d developed, of thinking of his career in terms of chapters, helped him seize the day to explicitly launch a next-phase strategy for Bust Buy. “The length of my chapters is typically three or four years,” he told us, “because it takes a few years to get where you’re going. Then you pause and say, Where do we want to go next?

He solicited input from consultancies, asking, “Tell us how we should organize to go after growth.” One result: “We created a Strategic Growth Office with about fifty people focused purely on refining the strategy and crafting specific initiatives that we could then go pilot.” They did intensive work on market segmentation and identified the core consumers they wanted to target: “high-touch technology fans, who love technology but need some help with it.” That led them to focus intensively on new services they could offer, which included, for example, providing technology and customer support for home health care, building on the success of the Geek Squad service model.

For example, Patrick Doyle, then a board director who went on to become chairman, suggested in a board meeting that Joly should, officially and publicly, declare the turnaround was over and announce the new growth phase. In March 2017, in the middle of his fifth year, Joly did just that. He announced the completion of the Renew Blue turnaround and introduced the Building the New Blue strategy. “I believe that you cannot have a strategy if it doesn’t have a name,” he shared, emphasizing that announcing the new strategy helped the company “more clearly close the door on Renew Blue and start the new phase.

Terry Lundgren ran into stiff resistance while executing his strategic plan in the years of his Reinvention stage. As noted earlier, he was appointed CEO of Federated Department Stores in 2003 with the express mandate to make bold moves to expand the business. After just three months at the helm, Lundgren faced a golden opportunity: purchasing the legendary Marshall Field’s chain. The acquisition would take the company a grand leap forward, and he would become the steward of another of the nation’s most beloved retail brands.

But his only competitor in the bidding, the May Company, was fierce. Months of intense and elaborate bidding machinations ensued, and in June 2004, Lundgren got word that Gene Khan, the May CEO, had swung for the fences with an offer one investment banker said “took my breath away.” Lundgren immediately backed out. He vividly remembers the difficult phone calls he had to make to his board. His first major move had failed.

But then, in January 2005, a mere eight months after May bought Field’s, the May CEO resigned; Khan was under fire for vastly overpaying to cinch the deal. Lundgren immediately seized the opportunity to buy all of May— much bigger game purchased for a fabulous price. “After selling assets that were part of the bigger $11 billion deal, we ended with a net purchase price of $3 billion,” he recounted, “which is $200 million less than what May paid for Marshall Field’s. I got Marshall Field’s plus all of the May Company assets that we wanted in order to expand our brand.

Some years earlier, Federated had snapped up the venerable Macy’s chain, and Lundgren proposed that as part of going international, Federated should change its name to Macy’s Inc. and change the names of its regional stores— Burdines in Florida, Lazarus in the Midwest, Robinson’s May in Los Angeles— to Macy’s. Some shoppers loyal to the Marshall Field’s chain were outraged, especially fans of the beloved flagship Marshall Field’s store in Chicago. Customers marched in protest, carrying placards calling for a boycott and jeering “Macy’s Is Just Wal-Mart with Pretension.

What Lundgren intuited— which tool a good deal of persuasion to impress upon stakeholders, both within and outside the company, over the course of the next several years— was that the more online sales challenged brick-and-mortar retail, the more important a truly national brand following would become. Federated had launched a retail website back in 1998, when Amazon’s business model was still a matter of much dispute and Amazon hadn’t yet branched out into broader department-store categories.

Some of Ferguson’s personal drive came from having “a problem-solving mindset, so chomping down on a really intriguing problem is for me what the job’s all about.” This was a constant theme in our research and interviews with the highest-performing CEOs. Ferguson, using the analogy of being the architect of a building, was also energized by the challenge of championing his own strategy. “It was very exciting because it is a vision, and I will take all the time necessary to go from rough sketch to blueprint, to bringing in the team, the subcontractors, to actually seeing the building. There’s nothing like it, it’s so very rewarding.” Ferguson also shared that he is comfortable with a “gradually making progress mindset.” “The key to my success,” he shared, “is my ability to keep at it every day.” Sustaining his energy through the long haul of these years also was an appreciation for small wins. “There are small wins even in big marathons. You chunk up these big, long, journeys into steps. Sometimes it’s just a board meeting in which you finally got someone to agree.”

Creating awareness of small wins, and celebrating them, was also key to sustaining his team’s energy after initially exciting them with the vision. “First, they needed the belief that the goal was worth the journey. Why does it matter? Then it was celebrating the small victories. So getting the document ready, finishing the analysis, getting the vote, all those steps.” For the company as a whole, “there were some metrics that we could share about in every town hall, having to do with asset flows, client wins, and our win-loss ratio.

In their proactive drive to get ahead of upcoming challenges and their persistence and resilience in pursuit of their goals, all these CEOs exemplified what psychologist E. Tory Higgins has named a promotion focus. Higgins describes it as focus on personal growth, attaining desired outcomes, and realizing ambitions. He contrasts it to a prevention focus, which directs attention to preventing losses, avoiding mistakes, and maintaining safety and security. CEOs with a prevention focus are primarily motivated by the desire to fulfill their responsibilities and avoid negative outcomes. They tend to prioritize risk minimization, seeking stability, predictability, and the avoidance of disruptions. They also generally adhere to established guidelines and procedures. In short, they’re playing not to win but to avoid losing.

Promotion-focused CEOs play to win. They take calculated risks and vigorously seek novel opportunities. In that quest, they foster a culture of creativity. They also demonstrate impressive resilience in the face of setbacks or unexpected challenges, allowing them to draw committees to their goals even during trying periods. This orientation towards proactive problem-solving is always a major asset for leaders.

High performers invest in growth vigorously. First, they fund growth by investing more in acquiring, upgrading, and maintaining their physical assets, such as property, plants, buildings, and technology. Their capital expenditure (CapEx) relative to sales rises considerably higher, from 12 percent in year one to 17 percent in year five. The low performers, but contrast, cut their CapEx spend from 9 percent to 6 percent in the corresponding period, attempting to save their way to prosperity. The high performers also invest more in innovation by driving up their R&D spend by 40 percent, from 10 percent to 14 percent by year five; the low performers’ R&D spend remains flat. Finally, after doing fewer M&A activities in their first three years, the high performers do more in year four, averaging roughly one acquisition annually from then on. The low performers engage in more M&A in the first three years, but it tails off, and the high performers overtake them in activity in year four.

The CEOs who are most successful in this middle stage come to understand that they won't be able to lead the transformation envisioned for the company without a personal transformation. Larry Merlo had never spearheaded strategy. Terry Lundgren came up in retail as a master of in-store merchandising, with no experience in online sales or in technology generally.

Yet research finds that when done effectively, culture change produces impressive results. Key is that specific desired changes in behaviour are articulated in clear alignment with the company’s strategy, not treated as separate from the core drivers of the company’s success. A recent survey of five hundred CEOs of global companies found that “most [of them] aren’t particularly intentional in their pursuit of culture as a core driver of financial performance.” Those who said they did see culture as a core driver of financial results, however, led companies that saw significantly greater revenue growth over a three-year period, a compounded annual growth rate (CAGR) of 9.1 percent versus 4.4 percent for the firms led by respondents who indicated they didn’t see culture as key to improving results.

Flush off of that achievement, Hoplamazian turned his attention to a feature of Hyatt that was the reason he’d decided to make his big leap. In his months as interim CEO, working closely for the first time with the Hyatt executive team, he realized that “there was something so special about the culture of Hyatt. I couldn’t quite put it into words, but nobody was showing up just to punch a clock.” He felt deeply that he’d had “a true emotional experience of joining the Hyatt family.” Now he decided to delve into the power behind that strength of connection he felt as fuel for growing the company.

In the year ahead, he surveyed the broader employee base as well as customers and learned that “we didn’t have that same emotional connectivity with our guests.” Or with Hyatt colleagues out on the front lines. Hoplamazian dedicated time to meeting with many of them. Through his own and others’ probing into the colleague experience, he realized that the company evaluated employees largely based on their compliance with an elaborate set of rules and that “we tracked success in our hotels by compliance with a list of brand standards, not guest feedback.

He and his team articulated a clear and highly motivating statement of company purpose: to care for people so they can be their best.

In our Life Cycle study we looked at how many of the top one hundred performers were sprinters or mid-distance or marathon runners, with a range of measures for performance. Note that in the full set of CEOs, there are roughly equal numbers of sprinters (38 percent), mid-distance runners (31 percent), and marathoners (31 percent). Yet, top performers tend to be sprinters and marathoners. And there are important differences in the nature of their performance success.

When it comes to TSR over their full tenure, marathoners were hands down the strongest performers, accounting for eighty-eight out of the top one hundred. But when it comes to CAGR, the sprinters were the winners with forty-five out of the top one hundred. The mid-distance group trailed on both of these measures. These findings reinforce the observation that during the years of the Complacency Trap, years six through nine, CEOs’ performance may be less than stellar, dragging down the overall performance numbers for CEOs who stay on through those years.

Our data shows that sprinters’ success results from a focus in their approach to business improvements that is strikingly different from successful marathoners’ approach. From the start, sprinters rely more on efficiency gains and increases in profitability to create value. This results in superior improvements in EBITDA margins from an average of 20 percent to 25 percent.

When it comes to organic revenue growth, however, sprinters invest less in it, and in fact they achieve lower rates of revenue growth, which on average decreases from 9 percent in their first year to 4 percent by year five. By comparison, marathoners, from the start, focus more on revenue growth, boosting it from an average of 10 percent in their first year to 15 percent by year five. They also maintain stronger revenue growth throughout their tenure, with it barely dipping below 10 percent in any of their other ten-plus years.

5. Complacency Trap

Shortly after sunset on November 29, 2014, the sixty-five-foot sailing sloop Vestas Wind was speeding through the choppy waters of the Indian Ocean, 268 miles from the nearest coast, that of the island of Mauritius.

But Nicholson and his navigator had determined this stretch of ocean posed no grave danger. Except, that was, for the thousand-mile-long string of coral reefs the Vestas Wind had unwittingly sailed straight into.

How could this have happened? Especially given that the captain and navigator had access to a remarkable array of high-tech navigational equipment. The official report concluded that the navigator had misread some data and failed to access other sources that would have alerted him to the danger. He had come to believe that the reefs they were fast approaching were underwater mountains— called sea mounts— the peaks of which were some forty meters below the surface. In making that assessment, he had not attended to a signal given by one important piece of equipment called a C-Map.

The story speaks to how even the most talented and experienced leaders, who’ve successfullly navigated through many challenges, may overlook or misinterpret arising threats or fail to perceive them at all. That may be true even when they’ve instituted good monitoring systems, with the best data gathering and analytics, and have crackerjack strategy and operations teams supporting them. Ironically, the more success they’ve driven, the more they may be given to misreadings and slackening of vigilance.

Much less focus, however, has been put on the problem of more gradual deterioration, or stagnation, of performance. Our Life Cycle research reveals that this is a particularly common development beginning approximately after the first five years of a CEO’s tenure. Company performance was lower on many fronts in years six to ten for two out of three CEOs than in their first five years. The rate of revenue increase slowed in these later years. Both EBITDA and ROIC slackened relative to earlier years, companies often became less efficient, and growth in operating income stalled.

When CEOs depart during the Complacency Trap stage of the life cycle, generally from years six to ten, inefficiencies that have crept into the organization and problems that have been festering— such as an underperforming unit or product line— constitute much of the low-hanging fruit their successors immediately go after. This invites the question: If those problems are so apparent to new leaders and boards that appoint them, why haven’t they been more effectively addressed?

As former Intel CEO Andy Grove wrote in his influential book Only the Paranoid Survive, “Business success contains the seeds of its own destruction.” CEOs who make it to the Complacency Trap stage have navigated the rough-and-tumble of the Launch, Calibration, and Reinvention stages of the first few years. One unintended consequence of leading their firms adroitly can be an overly assured attitude about the course they’ve set and the organizational improvements they’ve made.

Another factor at work here, though, is the status quo bias, a powerful and widespread psychological force in business. The concept was introduced by researchers William Samuelson and Richard Zeckhauser, who showed in studies with many kinds of decision-makers, including managers, that “when making an important choice, people are more likely to pick the option that maintains things as they are currently.” When you’re enjoying success, your status quo bias is reinforced, which might be just fine. But given that after five, six, or seven years, market conditions will surely have evolved, it usually won't be fine to stick with the status quo later. When responding to those changes would involve making a substantial alteration to or even reversal of a winning strategy or to operational engineering you have orchestrated, the status quo bias makes recognizing the need for change and making the case for it to your team and board a good deal more challenging.

Nigel Travis, who led Dunkin’ to strong revenue growth in nine years at the helm, observed in his book The Challenge Culture that companies “can quickly go from success to trouble . . . because the culture does not allow for challenging the status quo.” He shared with us that finding ways to break the spell of satisfaction with success was a main focus of his leadership. That was in part because of what he’d witnessed as a senior executive at Blockbuster.

Advice on combating the status quo bias by methodically rethinking business assessments and gaining perspective from outside the firm is not new. But the problem is that far too few leaders develop a rigorous and continuous discipline of doing so. And if CEOs don’t impose that discipline on themselves, nobody else will.

The imperative to challenge yourself becomes more difficult to achieve the longer you have been doing the job successfully. Nigel Travis said, “Being a CEO for longer is tougher because you have to find ways to keep improving.” Some CEOs recalled feeling less engaged in this stage, with boredom creeping in. “When you get into years six to ten, the intellectual stimulus is less,” one shared. “You come in with lots of ideas,” another commented, “and then run out of them.” Someone else said, “Years six to ten is a period of time when the luster is off the rose and what was new and exciting is no longer new and exciting.

Investors and analysts may also communicate directly with CEOs, providing well-founded criticisms and good arguments for change needed, or at least challenging a CEO’s current views. Nigel Travis highlighted that “I’ve always loved dealing with investors and analysts because it gives you that outside-in perspective. Who else could I talk to who’d studied and gone into Starbucks, into McDonald’s?” his two leading competitors. “It really enhances your understanding of the competition and broadens your external perspective enormously.” He shared that before leaving any investor or analyst meeting, he’d say, “I’ve listened to all your questions. Now, I’m going to ask you one: Tell me what were doing wrong. What would you do differently?” Being receptive to and actively soliciting such critique was only one way he combated status quo bias at Dunkin’.

One drill to force reexamination was this: “About once a year I would say, ‘Okay, we’ve been taken over by a PE firm, what are they going to do?

Travis found a number of additional ways to regularly tap into the perspective of those outside the firm. He would appear at Q&A sessions with MBA students, which gave him access to the views and attitudes of younger people. In addition, twice a year he attended CEO Summits held by Yale School of Management professor Jeffrey Sonnenfeld. These are vigorous debate events in which leaders across industries and from around the globe, as well as government figures, research analysts, and journalists, are challenged to engage in wide-ranging discussions of topics, from global political issues, such as competition with China, to leadership style. Attendees are often put on the hot seat, for example, to defend a statement they made in the press. Travis recalled that one summit he was pitted against an investor who had very publicly shorted Dunkin’ stock and whom Travis had strongly rebuked in a press interview. As he wryly commented about the encounter, the sessions ensure that “you can't fall asleep.”

The single most helpful source of outside perspective Travis found was gained by joining the boards of other companies. “If you asked me about the one thing I’ve done in my career that really helped my development as a CEO,” he told us, “it was sitting on another board. Every time I got to a board meeting, I write down more about the company I’m running than I do about that company.” Acknowledging that many CEOs say they don’t have time to serve on another board, he stresses that not only does it help to see how other companies operate but also the other company has “got a plethora of experiments going on that you can utilize for your company.

In our work with executives, we’ve seen that joining another board early in a CEO’s tenure may be too large a demand on time, but after the CEO has achieved success, their middle to later years should afford more time for valuable external activities. The key is to make sure a board opportunity is truly valuable in terms of insights to bring back inside.

Dave Cote and his assistants allocate two to three “X days” on his calendar every month when he’d have no meetings. He used that time to contemplate new ideas for the business, jotting them down in a blue notebook, and he established a self-discipline of regularly revisiting those notes about every six months. “The process of working through my blue notebook,” he writes, “allowed me to break free of my daily context and look at our business from something approximating and outside perspective.

Reed Hastings developed a discipline of staging formal debates with employees. He’d ask a few people to prepare arguments both for and against a possible change to make and present their findings to the whole team in the Netflix theater, and then they’d break into small groups to debate the positions. At one such meeting, the question was, “Should we spend more money, less money, or no money on kids’ content. . . . One director who is also a mom got up onstage and passionately declared, ‘Before working here I subscribed to Netflix exclusively so my daughter could watch Dora the Explorer. I care a lot more about what my kids watch than what I watch myself.’” The debate led to the decision to hire a VP of kids and family programming, as well as to begin creating original animated shows. “After two years,” Hastings reports, the company had “tripled our kids’ slate, and in 2018, we were nominated for three Emmys for our original kids’ shows.

In his first two years in the role, Craigie conducted a deep strategic analysis and homed in on gross margins as the lynchpin to sustainable growth, the “gas in the engine,” he said.

For acquisition, he shared, “We would look at almost anything that came up within the industry for sale, and we had four factors that drove our decisions. One, we would only buy number one or two share brands in their category. We did not believe we could take a dying brand and turn it around. Two, we wanted to buy businesses that had higher gross margin than out company average, so would help our gross margin. Three, we looked for asset-light companies. We didn’t want to buy a company with lots of factories or ones for which we’d have to build new factories. We preferred to bring operations into our own facilities. And four, we went for products that had some sort of advantage versus the competition that we could leverage with our marketing, sales, and operations muscle to make better.” That formula guided the well-measured acquisition of numerous leading brands during his tenure, including Spinbrush, OxiClean, Orajel, Batiste, and Vitafusion. These were businesses that his own business leaders had the expertise to run, and he folded them into Church & Dwight’s existing operations. Focusing on employees with R&D expertise, they kept, on average, only 10 percent of employees, many of whom joined the team at headquarters. “We doubled the size of the company,” he reported, without adding substantially to the number of employees.

The bonuses “for my C-level team were all based on the same four factors: 25 percent based on revenue growth, 25 percent on meeting the gross margin target, 25 percent on hitting the earnings per share goal, and 25 percent on making the cash flow target.

What’s more, showing great confidence is a powerful advantage in business because it leads people to evaluate you as more competent, which can make you more influential. The allure of confidence even appears to be embedded in our brain. Studies have found that when we encounter someone exuding confidence, an area of our brain involved in feeling positive emotion, the ventromedial prefrontal cortex, is stimulated. Scientists conjecture that we’ve evolved to fear uncertainty, and confident people come across as having good reason to be certain.

One remedy: actively cultivate confident humility. Wharton School professor Adam Grant writes in his book Think Again, “The most productive and innovative teams aren’t run by leaders who are confident or humble. The most effective leaders score high in both confidence and humility.” How to get the balance right?

Gupta also demonstrated another tendency that helps keep success from leading to overconfidence: being tough-minded about situational factors that contributed, such as a bull market lifting virtually all boats. When reflecting on the great results of his first few years, Gupta shared, “We had fixed a lot of the fundamentals, but I got lucky, because China opened up in 2010. For the first time, the Chinese Central Bank allowed Chinese companies to go to the financial markets of Hong Kong and Singapore” for funds and trading activity.

The perceived wisdom then,” he recalled, was that DBS should create a separate division for digital banking or buy a fintech start-up. “We took a contrary view. We were going to bring everyone along. Our battle cry was that we were going to become a twenty-thousand-person start-up.” He invested heavily in retraining existing employees and hired a phalanx of data scientists. To engage employees in the mission, he launched regular hackathons and he set a goal of conducting one thousand experiments a year.

With a strong focus on optimizing the potential of artificial intelligence, he had to pour himself into learning about the technology. One way he did so was to take part in a global competition called DeepRacer hosted by Amazon Web Services. Participants must program a self-driving model car that they race on a track, and competitors with the fastest time then compete in a showdown. From this endeavor, not only did Gupta learn more of the ins and outs of AI development but his participation also inspired employees throughout the organization to embrace the reinvention. Three thousand DBS employees participated, and out of them, Gupta came nineteenth in the race. DBS won the competition for the Asian region, and three of its employees participated in the grand finale held in Las Vegas.

The result of Gupta’s constant push for innovation is that DBS was named best bank in the world by Global Finance magazine, not just that once in 2018 but every year thereafter, for five years in a row as of this writing.

6. Legacy

As opposed to large spikes up and down in TSR often seen in earlier stages, in the Legacy years results tend to be steadier. Although a CEO’s highest performance throughout their tenure might occur in earlier stages, resulting from, for example, the honeymoon lift or the beginning of the Reinvention stage at about year three, the Legacy years are distinctive for their reliability. Leaders in their Legacy stage more consistently deliver strong results.

Consider Dave Cote’s fifteen-year run. It wasn’t until his tenth year that he finally gained widespread recognition for Honeywell’s remarkable turnaround. He knew from the start that the transformation of Honeywell he envisioned would take ten to fifteen years, and he committed himself to staying for the required duration— assuming, of course, that the board didn’t ask him to go. He had not underestimated the task before him.

That was the result of Cote’s marathoner “go slow to go fast” moves coming to fruition. Rather than flashy, highly risky, and dramatic moves, he’d made rigorously calibrated incremental improvements in business operations. These were combined with a steady stream of divestments and moderate acquisitions. Indeed, he is a standout example of someone who has mastered programmatic M&A, the systematic, highly strategic, and well-paced acquisition of relatively small companies compared the the size of the acquiring firm.

Analysts wondered when this restructuring would end,” he said, “and they didn’t like our answer: never.” He was highly cognizant that “entropy is the rule in organizations, as it is in the physical universe. Over time, all organized systems evolve toward chaos. Unless you pursue change relentlessly, your efforts will eventually wither away.” Cote didn’t let that happen.

• What things did I regret having sacrificed to date that I now wish to prioritize higher in my life going forward?

• When in my life (and not simply my career) have I found myself performing at peak levels, filled with genuine passion and purpose?

• In what environment do I seem to perform at my best?

• In what environments do I not perform at peak levels or enjoy the work?

7. The Private Equity Sprint

PE ownership also means, however, that the CEO has a good deal less autonomy than the public company CEO in setting the direction for the firm. The investment thesis includes a series of benchmarks for achieving results by a given time. It also includes an ambitious target for return investors, which will be in excess of the anticipated return of public markets. Achieving those results in the time planned is an intense challenge, one that involves considerable risk for portfolio company CEOs. The intense pressure to quickly produce results overwhelms many.

Research has found that 73 percent of PE CEOs are replaced at some point during the holding period, most often within the first two years, because PE boards demand faster proof that the CEO is meeting performance goals. Being replaced may lead to substantial financial loss for the CEO because, in PE deals, the CEO and some of the upper management team are usually required to invest personal wealth in the deal. In return, they’re granted a portion of the increase in equity realized at exit, the amount of which varies but is generally between 2 percent and 4 percent.

Though Hilton had grown considerably in recent years, largely through acquisitions, including DoubleTree, Embassy Suites, and Hampton Inn, it had taken on a heavy debt burden, and the stock was trading at a lower multiple that its competitors’. But the fundamental problem, Nassetta understood, was the company’s culture. “There was no culture of innovation,” he said. “It was more a culture of do it at a relatively slow pace and do it the way we’ve always done it.” Changing that would be a daunting challenge.

In 2023, in fact, Hilton was named by Fortune as the number one great place to work in the world.

The first stage, Proof of Performance, can range from less than a year in duration to an upper range of two years, depending on the results being achieved. Although the Launch stage for public company CEOs is intense, private equity partners, CEOs of PE portfolio companies who have also been public company CEOs, and directors who’ve worked with both the public and PE models unanimously agreed that the expectation for fast results was even greater for the PE CEO. Instead of being afforded a honeymoon or the exploratory period of a listening tour, a PE CEO is expected to immediately begin implementing the elements of the detailed investment thesis.

PE firms act quickly if early targets are missed. Indeed, research has found that one-third of PE CEOs are forced out within the first one hundred days of PE ownership.

As opposed to the hourglass model of the public company— in which the CEO controls the flow of information to the board— the PE model is a leadership triad. The PE firm deal lead and board directors have full access to information and are closely involved in the running of the company.

Public boards typically limit their interactions with CEOs and other company leaders to formal scheduled meetings. PE boards eschew that approach in an effort to stay deeply connected with company decisions. Courtney della Cava, global head of portfolio talent and organizational performance at Blackstone, shared, “We encourage our board members to interact regularly with their respective business and functional leads as well as the CEO and other board members.” She emphasized that, whereas public company CEOs tend to think of board relations as about managing the board, in the PE model, that approach won’t work. A partnership mentality is best in the public context, also, but under PE ownership, its imperative. PE firm boards aren’t interested in slide presentations or any of the theater of public board meetings.

In recent years, to further enhance the support the board can provide, some PE firms have been appointing a select number of independent directors to work directly with senior executives in addition to the CEO.

In the PE model, information flows much more freely to the PE board through multiple channels. Ops teams not only provide support for the CEO but also report directly to the deal lead and PE board about issues they’re uncovering. Members of those teams, as well as the deal lead and board members, can reach out directly to company managers at any time. Leaders who are keen to play the role of gatekeeper, particularly those who want to use it as a means of consolidating power, are not a good fit for the PE model.

For those who favor collaborative partnership, the trade-offs for less autonomy can be great benefits from much more intensive guidance than a public CEO can access.

He was curious about why Crocs wanted PE investment, given that the company was actually well financed, with strong cash flow. “They knew Crocs needed a strategic change,” he recalled, “and they felt that the best way to set the company on a positive new trajectory was to seek a minority investor from the private equity community.” Sales of the distinctive colorful clogs had been slumping, and the share price had been pummeled. Some industry arbiters thought the quirky brand had peaked, proving to be a trendy flash in the pan.

Crocs negotiated with Blackstone to sell it a 13 percent stake for $200 million, rather than an outright buyout, and awarded two board seats as part of the deal. Blackstone was deeply engaged in assisting with the turnaround, digging into data and helping drive change. The firm’s involvement also provided “tremendous air cover,” Rees said, meaning protection from the market’s punishment of the stock. For five years of “what was a very challenging, deep-seated turnaround,” he described, Crocs “didn’t worry about quarter-to-quarter decision-making; rather we set our focus on long-term, multiyear decision-making, which was initially difficult, as our stock was moving dramatically” due to those moves.

Opinion about the high-engagement PE model is not universally positive. Some criticize the intense involvement of PE firms for turning the CEO into more of a “COO plus.” In this view, PE firms are primarily interested in hiring executives great at execution, who will put strong emphasis on operational improvements. They aren’t looking for input— or not much— into the strategy for growth, and they curtail CEO power.

In all cases, an essential truth is that the CEO is still the one primarily in charge of running the company. The PE firm provides an idealized model of the transformation process, and the CEO brings the wisdom of experience in how to actually manage the messier, human process of execution.

In the past, primary emphasis was placed on financial and operations acumen— still, obviously, important— but today the vanguard of innovators in the sector increasingly appreciate a CEO’s people leadership skills for achieving the above-market returns investors expect.

Improving the performance of companies that are performing fairly well is now the predominant objective, and PE firms have learned that a CEO’s people leadership abilities are the vital complement to strength in finance and operations for this new frontier of performance improvement.

When it comes to investing in leadership development, PE firms have thus far focused on providing executives of portfolio companies a richness of opportunity for networking and peer-to-peer exchanges with other leaders in their portfolio companies and their vast network of advisers. They’ve worked to create rich ecosystems to facilitate these kinds of opportunities. “We spend a lot of time nurturing our talent network,” Courtney della Cava shared. These networks provide entrée to hundreds of other C-suite leaders, board directors, and company stakeholders who can provide input, from customers to suppliers and regulators. “We actively cultivate communities among our various executive cohorts,” she explained. This may be done, for example, by hosting regular gatherings where leaders can confer about issues and build relationships. The firm may also take the lead in making introductions across the ecosystem. A CEO of a mid-cap health-care company might, for example, be introduced to her counterpart at a fast-growth tech company who has invaluable expertise in cybersecurity or AI implementation.

To optimize opportunities for leaders it wants to bring in and retain in its fold, Blackstone has pioneered by actually creating a company for two standout talents. The firm perceived an opportunity to build a company for Thomas Staggs and Kevin Mayer to lead. Both men had been passed over to succeed Bob Iger at Disney. First, the firm bought Reese Witherspoon’s company, Hello Sunshine, and then they added children’s entertainment Moonbug and Exile Content Studio, creating Candle Media, with Staggs and Mayer as cofounders and co-CEOs.

8. Succeeding With Succession

One way in which we hope our CEO Life Cycle findings will held bend the curve of success for CEOs is by shedding light on these junctures so that CEOs can anticipate and prepare for them and boards can address these problems. In this chapter, we focus on another way the board relationship is often problematic: when a board is not closely involved with a CEO throughout their tenure, they are missing the opportunity to ensure that a strong bench of talented leaders who could be the next CEO are identified and their abilities are developed.

In a 2019 survey of 222 CEOs of companies around the globe, 76 percent reported that there was not a leader within the company who was ready to take over their role, and 60 percent said that their company lacked a succession plan. A 2021 study by Stanford researchers found additional evidence of the lack of preparedness, revealing that 22 percent of CEO appointments from 2017 to 2021 were interim— effectively placeholders while boards searched for a permanent successor. In another 10 percent of cases in which the departure of the CEO was announced, the board didn’t even have a good interim candidate to appoint. The transition was delayed considerably while the board searched for a successor.

Inadequate succession planning comes at great expense. A study of CEO transitions at the world’s 2,500 largest public companies determined that the average cost in shareholder value of a poor succession decision— defined as needing to fire the CEO— was $1.8 billion per company. The cumulative value destruction is staggering. Researchers who evaluated the total annual cost of poor CEO transition by the S&P 1500 estimated it comes to nearly $1 trillion. Insufficient onboarding support for new CEOs alone amounted to missed opportunities of $109 billion in value creation.

Although succession planning is often written about in step-by-step terms as a straightforward process, the truth is that any secession is an extraordinarily complex, anxiety-producing, and emotionally intense human process. The stakes are exceptionally high for all parties involved, and that often leads to problematic behavior.

In general, board engagement in the succession process is limited until the time of the decision, which is usually within a year of the transition. Then, they might rush to judgment based on just one or perhaps two interviews with candidates, people with whom they’ve often had little or no other interactions. So little hands-on knowledge of candidates fuels the numerous cognitive biases in their decision-making. One bias is the preference for simplifying narratives, or relying on stereotypes about what a CEO should look and sound like to privilege candidates who are super confident or have a powerful physical presence or can claim bold, even brash, achievements.

We confronted this bias when we were advising about a succession and recommended the board take a more serious look at a candidate. They’d dismissed Alex as not having the needed smarts and being just a solid “doubles hitter” rather than the star slugger they were looking for. But our assessments indicated he had the smarts in spades, and as a doubles hitter, he was a real standout. We brought some of his accomplishments that had been underappreciated back to the board’s attention. We also coached him to project a stronger image, including sprucing up his attire. The combination did the trick, and the board selected Alex, who went on to achieve a great deal of success in an eight-year tenure.

The merit of getting to know prospects to choose a good successor was evident in Charles’ case. He’d risen to the top of the heap of candidates through a long and rigorous process during which the board had gotten to know him well. They’d been presented with a wealth of information about his accomplishments and leadership talents, and they felt confident he was right for the job. But then he totally whiffed his interview with them by showing up in the manner of a direct report rather than speaking to the directors as a peer. He didn’t come across as the authoritative leader they could rely on to be forceful with them or to make the tough calls and bold moves that would take the firm where it needed to go. They were really taken aback, and they began to reconsider an external candidate.

But all that they had learned about Charles over the prior five years ultimately prevailed. Because of the experience they had with him, they agreed when we urged them to give him another chance to present. We gave him feedback and shared what the board had said about his prior performance before them. He took the feedback well and returned very much as the in-command CEO the board wanted to see. This ability to take feedback and adapt gave them even more confidence that he would continue to grow once in the role. Charles was appointed and has had a highly successful tenure.

Acknowledgments

We were fortunate to be surrounded by some of the best leadership advisers on the planet. We tapped into the wisdom of our colleagues Cathy Anterasian, Ellen Kumata, Tony Byers, Julie Daum, Ann Yerger, Sabine Vinck, Colin Graham, Jordan Brugg, and many others to gain additional context of the inner game that CEOs face day in and day out. Many of them connected us to exceptional CEOs we were keen to include in our research.

Among many colleagues who specialize in helping pre-CEOs prepare and new CEOs outperform in the role, Janine Ames, Brett Clark-Bolt, Darleen DeRosa, Chris DeRose, Nick Falk, Cassandra Frangos, Adam Kling, Filomena Leonardi, David Metcalf, Michael Milad, Kathy Schnure, Levi Segal, Christopher Uhrinek, and Muthiah Venkateswaran have been generous with their time and wisdom.

Notes

Chapter Four: Reinvention

1. Rose Gailey, Ian Johnston, and Andre LeSueur, “Aligning Culture with the Bottom Line: How Companies Can Accelerate Progress,” Hedrick & Struggles, www.heidrick.com/en/insights/culture-shaping/aligning-culture-eith-the-bottom-line-how-companies-can-accelerate-progress#RefN2

Chapter Five: Complacency Trap

1. John Clarke, “A Twenty-First-Century Shipwreck,” New Yorker, December 10, 2014, www.newyorker.com/sports/sporting-scene/twenty-first-century-shipwreck.

1. Nigel Travis, The Challenge Culture, Kindle ed. (New York: PublicAffairs,2018), 34.

1. John Antioco, “How I Did It: Blockbuster’s Former CEO on Sparring with an Activist Shareholder,” Harvard Business Review, April 2011, https://hbr.org/2011/04/how-i-did-it-blockbusters-former-ceo-on-sparring-with-an-activist-shareholder.

1. Dave Cote, Winning Now, Winning Later, Kindle ed. (New York: HarperCollins Leadership), 61.

Chapter Eight: Succeeding with Succession

1. Eben Harrell, “Succession Planning: What the Research Says,” Harvard Business Review, December 2016, https://hbr.org/2016/12/succession-planning-what-the-research-says.

1. Claudio Fernández-Aráoz, Gregory Nagel, and Carrie Green, “The High Cost of Poor Succession Planning,” Harvard Business Review, May—June 2021, https://hbr.org/2021/05/the-high-cost-of-poor-succession-planning.