January 3, 2014 |
The longer CEOs stay in power—and a new study suggests most of them exceed the optimal tenure length by about three years—the likelier those executives are to limit outside sources of market and customer information, ultimately hurting firm performance.
Research published in Strategic Management Journal, “How does CEO tenure matter? The mediating role of firm-employee and firm-customer relationships” examines why a longer CEO tenure might not always produce positive results for company performance.
Charles Gilliland Professor of Marketing Xueming Luo and Michelle Andrews, a doctoral candidate, collaborated with the University of Missouri to explore two primary stakeholders—employees and customers—influenced by CEO tenure.
The team studied 365 U.S. companies over the course of a decade (2000–2010), measuring CEO tenure, and calculating the strength of both firm-employee and firm-customer relationships. The researchers found that the longer a CEO serves, the stronger the firm-employee relationship becomes. However, an extended period with the same CEO results in a weakened firm-customer relationship over time.
According to the study, the average CEO holds office for 7.6 years, but the optimal tenure is 4.8 years.
“As CEOs accumulate knowledge and become entrenched, they rely more on internal networks (employees) for information, growing less attuned to market conditions and customers,” Luo explained. “And because those longer-tenured CEOs have more invested in the firm, they favor avoiding losses over pursuing gains. Their attachments to the status quo make them less responsive to vacillating consumer preferences.”
In the early stages of their position, CEOs demonstrate a desire for a diverse flow of information and engage in receiving information from both external and internal sources. Therefore, company relationships between employees and customers is positive.
However, as CEOs become more knowledgeable and serve for a longer period of time, they begin to focus on the flow of information from internal sources rather than external ones. This leads chief executives to resist challenging the status quo, further alienating them from market environments and weakening customer relations. Ultimately, that hurts firm performance.
“We’re not saying, ‘Fire your CEOs after 4.8 years,’” Andrews said. But if boards develop incentive plans for longer-tenured CEOs to encourage more reliance on external market trends and dynamics, customer relations—and therefore, company performance—might be enhanced.
“You’re only a firm if you have customers,” Andrews noted. “Without customers, no firm can prosper—or even survive.”