CEO Tenure

How long should you plan for?

Warren Buffett and Les Wexner both served as CEOs of their own companies for over 50 years. Bill Gates founded Microsoft in 1975 and stepped away in 2020. Jensen Huang, co-founder of Nvidia, has been at the helm for over 30 years. Among appointed CEOs, Richard Fain of Royal Caribbean served for 33 years, while Michael Eisner lasted 21 years and Jamie Dimon (still in office) is approaching his 20^th anniversary in 2026.

Given the turbulence of global business markets since the 1970s, these are remarkable stints. They prove that sitting CEOs are capable of adjusting to incredible challenges, although it obviously helps if you are an owner-founder. For boards engaging in succession planning and individuals plotting out their careers, how long should the expected tenure be and more importantly, why that number? The answer is more complicated than it seems.

The average tenure of Fortune 500 CEOs is currently 6.8 years, it’s lowest since 2018 according to Russell Reynolds. Still, most would agree that a seven-year run as CEO is not bad. Boards value both continuity and fresh perspectives and are usually divided when it comes to trading in a reliably performing current office holder for a promising new prospect. Of course, age, health and other factors come into play so there isn’t always a choice to be made by the board of when a CEO steps down.

Leaving tenure open-ended but expecting an average run is the default position given the uncertainty of our times. But is that the best practice or should boards and candidates be giving this issue more thought? I believe they should and let me explain why.

At the extremes of outstanding or terrible performance, decisions about continuing are obvious but executing the decision is not always as straightforward as you might imagine. In the case of stellar performance, the board may wish for the CEO to stay on, but the CEO may have made other plans based upon their personal timetable. Having groomed a successor who is expecting to take over, the CEO may not accept the offer to carry on, as flattering as the offer might be. Family circumstances may also be a factor, as significant others may have made plans for the CEO as well. Short-term extensions are usually negotiable but can take on a lame-duck quality that defeats the purpose. Short-term office holders may be less inclined to start new transformation efforts, begin negotiating complicated acquisitions, or shake up the executive ranks.

Poor performers can be jettisoned but not always without collateral damage. Investors may question why the board hired the person in the first place, raising concerns about the composition of the board. Follow-on departures in the executive ranks can also add to the turbulence of an unexpected exodus. Highly qualified replacement candidates may be wary of taking on the job given the way the departure was handled and the organization may go through a period of grieving and adjustment that interrupts ongoing efforts to improve performance and restarts strategy-making at zero. Moreover, given how litigious our society has become, boards should expect lengthy and expensive suits to follow early dismissals even after offering generous severance packages. As is the case with other employees, documenting evidence of CEO performance issues is a good idea even though it has the potential to taint the CEO’s relationship with the board. A CEO who isn’t appreciative of corrective feedback is alerting the board to a flaw that will likely need to be addressed in the future anyway.

Thus, deciding on when to end the tenure of a CEO is never easy, even at the extremes. Boards should discuss in advance the criteria they want to weigh in making decisions to negotiate continuations or departures should the need arise.

When performance is not a key factor in the decision, planning appropriate lengths of tenure becomes more challenging. Forces in favor of longer tenures include:

· The organization is performing well

· A desire to keep the focus on the execution of ongoing strategic and operational improvement plans

· Wanting to further reinforce specific aspects of the organization’s culture over time

· Retaining key executives loyal to the CEO

· Building and maintaining relationships with key stakeholders

· Investor confidence in the new CEO and board

· Hiring a more youthful CEO with a long runway ahead

· Talent attraction. Better candidates will be interested if the pattern of tenure is longer

Conversely, forces favoring shorter planned tenures include:

· A clear need to shift the business model to one that requires different expertise on the part of the CEO

· A sense that the culture has become too comfortable and that the tenure of those in key positions has become exceedingly long on average, slowing down innovation and blocking the consideration of new pathways to growth

· A planned CEO exit through an IPO or proposed merger/acquisition

· Board divergence concerning the future direction the company should take, making it frustrating for the CEO to operate

· Choosing to bring in a turnaround CEO who will make drastic changes and then depart to clear the way for a new era of operations

· Hiring an experienced CEO who is closer to retirement

Because there are so many forces at play, it may seem pointless to plan in advance how long a CEO’s tenure should be. However, there are good reasons for wanting the CEO’s tenure to be shorter or longer and therefore, it makes sense for the expectations of the CEO and Board to be aligned. Both parties can monitor the situation and suggest lengthening or shortening the proposed window based upon current events. The important thing is for the two parties to be planning together rather than separately. Out of the gate, no one imagined that Richard Fain, Michael Eisner or Jamie Dimon would be in their positions for decades. And yes, there may be something to the argument that after a certain point, long tenures can slow the flow of new ideas. But then, Warren Buffett and Bill Gates seemed to do ok by sticking around. Rather than set a hard term limit, discussing a proposed plan but then continuing the dialogue would appear to be the way to go.