When Sir Wilson Whineray announced his intention to resign as chairman of Carter Holt Harvey earlierthis year, the reaction was mix of regret and admiration. Even after 10 years in the role and 35 years with the company, nobody suggested, at least overtly, that he’d outstayed his welcome.
Auckland International Airport chief executive, John Goulter, also knew how to quit while he was ahead. Last year he picked up the Deloitte/Management magazine title of Executive of the Year. Before he leaves later this year, he expects to notch up his 15th successive record annual profit for the company.
Now contrast such controlled and well-signalled departures with the unseemly display of finger-pointing that accompanied precipitate leadership exits from insurance company and high profile arts and culture sponsor Tower Corporation, which last year announced $75 million loss.
The company’s long-standing chief executive, James Boonzaier, left suddenly in July and was subsequently and unceremoniously publicly roasted by his former chairman as being responsible for the company’s poor performance. Shareholders, not unreasonably, thought the company’s board should share some blame and in February its almost equally long-standing chairman, Colin Beyer, also stepped down.
We offer these examples not because they are unique, but simply because they are timely anecdotes that give rise to the question: how do leaders know when it’s time to go?
Top-tier churn
International research suggests tenure at the top is shrinking. The turnover of chief executives in particular has been accelerating at dizzying rate over the past decade, according to global human resource consultants Drake Beam Morin (DBM). Its study of 481 major organisations in 25 countries found that the median tenure for current CEOs is mere 2.75 years. Half of those included in the sample held office for less than three years; 72 percent were at the top for less than five years. Nearly third of the companies surveyed changed their CEO at least once during the brief 2000/01 period of the study.
A study released last year by international consultancy Booz Allen Hamilton found CEO turnover at major corporations increased 53 percent between 1995 and 2001. The number departing because their company reported poor financial performance increased by 130 percent.
It’s probably inevitable that tough economic times prompt more churn at the top but, as the DBM study notes, turnover had speeded up before the economy turned sour.
Earlier research revealed that CEOs appointed after 1985 were three times more likely to be fired than CEOs appointed before that date. What DBM found startling was the shorter time served in office by current CEOs – trend that appears to be global.
In gentler times, most leaders either retired with honours or died in harness. Now they’re both arriving and leaving at younger age. Some choose to jump, often into more attractive terms and conditions attached to more challenging roles. About quarter are spun out in the generalised churn of mergers and acquisitions (in an earlier survey that proportion was nearly half); and some grab their golden parachutes and leap after failing to deliver on board or shareholder expectations.
Markets and shareholders are increasingly unforgiving of poor performance. And since Enron and company, ejected CEOs are accompanied by their chairpersons and other directors who, it seems, are coming under closer scrutiny.
In recent comprehensive review of the roles of non-executive directors, UK-based investment banker Derek Higgs (Higgs Report: January 2003) offers bundle of recommendations aimed at making boards more independent and accountable to shareholders.
Higgs, like many before him, called for the clear separation of the roles of chief executive and chairman and suggested veto on CEOs moving on to chair the company they previously managed. He also suggests non-executive directors meet at least once year without the chair and executive members present. Their scope for discussion would include issues of tenure and performance reviews.
Non-executive directors should serve two three-year terms, according to Higgs, though he doesn’t entirely discount longer term. And while he doesn’t advocate setting fixed term of chairmanship, he thought it useful to appoint chair for three-year terms to be renewed “if appropriate”. Sir Wilson cited the Higgs report as one reason for thinking his 10 years at the head of CHH’s board table was long enough.
Higgs also suggests that as part of its role in succession planning, board’s nomination committee should review the chair’s position, and balance the interests of continuity against the desirability of introducing fresh approach. And this is pretty much the point of balance that both board chairs and CEOs in New Zealand look at when considering whether to move on, move over or move out. The trick then, is to stay long enough to provide coherent vision and direction but not so long as to run out of ideas or strategies for adding value.
Seeing exit signs
Leaders who know when to leave are, it seems, the exception and not the rule in New Zealand. “You just don’t see many of them stepping down at their peak,” says executive consultancy Watson Wyatt’s managing director Paul Loof.
And OCG Consulting’s chief executive George Brooks agrees. “Very few of them know when it’s time to go.” Goulter and Ralph Norris, who left the ASB Bank in good heart when he resigned as CEO couple of years ago, are held up as being among the enlightened few.
Board members also seem to hang on like grim death even when they preside over collapsing share values, says Brooks, citing the crumbling of Tower shareholder value as an example. “Much better to do the honourable thing and fall on your sword. It’s better for the business because it diverts the spotlight when the whipping boy is no longer around. But for him [Beyer] to come out and beat up James Boonzaier when the board had supported his decisions during the years he was chief executive was extraordinary.”
Ego often outweighs commercial judgement, prompting people to remain past their use-by date. Brooks, for his part, suggests that if board can’t improve shareholder value it should be smartly turned out to graze. “If shareholder value is going the wrong way, [board members] should be brutally removed – even before management. Usually it’s the other way round.”
Chief executives need time to create an environment and prove its value, given the inevitable ups and downs of economic cycles. “Five years may be too little but eight years is probably getting there,” suggests Brooks.
Loof suggests one reason for the shrinkage in CEO tenure can be found in the changing needs of business. “The best theory is the one that says different businesses need different leadership styles at different phases in their development. Those who are good at change management are not also those who can handle steady state. That’s even more true in reverse. Steady-state CEOs don’t cope so well in turbulent times.”
Loof suggests getting the strategy sorted first, then finding the best people to progress it. CEOs and boards should realistically appraise what leadership style best suits current strategy and future directions. But that’s not an easy ask when the CEO happens to be the business founder, fairly common situation in this country.
New Zealand’s commercial history, according to Loof, is studded with examples of company founders who couldn’t keep their hands off the steering wheel even after they’d hired top-notch driver. Examples like McConnell Dowell and Lowe Walker. The transition can be critical fail-point both for the company and the newly appointed CEO.
And family dynasties add another complication. Founder’s descendants itching to get their hands on the reins or operating under the delusion they already have are problematic. Top end example
