First, senior leaders often have much of their emotional equity invested in the past. The average age of an S&P 500 CEO is currently fifty-eight, up three years since 2008. Average tenure is eleven years, the longest since 2002. While veteran leaders may have the benefit of experience, they’re weighed down by legacy beliefs. Many of their assumptions about customers, technology, and the competitive environment were forged years or decades earlier, and reflect a world that no longer exists.
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The data suggests that institutional inertia is endemic, and costly. Consider:
- Only 11 percent of the companies that made up the Fortune 500 in 1955 are on the list today
- The average age of a company on the S&P 500 Index has fallen from sixty years in the 1950s to less than twenty years currently
- Between 2010 and 2019, US public companies reported more than $550 billion in restructuring charges, which are typically the product of belated or inept attempts at strategic renewal
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.
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.
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.
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.