The executives who appeared on the Harvard Business Review's 2019 list of best-performing CEOs in the world showed remarkable longevity in their roles.
The average honoree has been CEO for 15 years, more than double the S&P 500 average in 2017 of 7.2 years. All these people have created tremendous value during their careers — but like most other CEOs, many have experienced short-term ebbs and flows in performance.
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For boards, that can create a quandary: How to tell when a CEO is suffering from a negative blip versus a longer-term problem, and how to react?
Very little data exists on how CEOs tend to perform over time; CEOs, directors and investors often fill the knowledge vacuum with anecdotes, assumptions and rules of thumb. To better understand the typical course of value creation over a leader's tenure, we launched what we call the CEO Life Cycle Project. Our team of researchers tracked year-by-year financial performance over the complete tenures of 747 S&P 500 chief executives and conducted 41 in-depth interviews with CEOs and directors about their experiences. By comparing CEO performance based on years in office rather than calendar years, and by viewing a composite of individual journeys, the HBR identified five distinct stages of value creation that many CEOs will experience during their tenure.
YEAR 1: THE HONEYMOON
Most CEOs achieve above-average performance in their first year. They enter the job with fully charged batteries, ready to take the lead. Enthusiasm for change lifts the stock price and unites investors, the board and the organization.
During the honeymoon, CEOs learn to deal with competing priorities, decide where to focus their attention and determine which stakeholders deserve a portion of their limited time. The key differentiator for later success is how much the new CEO learns versus merely operates. With so many demands on his or her time and attention, it can be easy to get stuck in execution mode. Actively developing the ability to step back, reflect and recalibrate expands a CEO's tool kit, improves pattern recognition and increases speed to action.
YEAR 2: THE SOPHOMORE SLUMP
After the exuberance of the honeymoon, the pendulum typically swings the other way, often driven more by unmet expectations than by significant problems. In some cases, an unanticipated challenge will garner more negative attention from investors than it deserves.
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CEOs should recognise the frequency of sophomore slumps and manage expectations about a potential slowdown. CEOs and boards can turn this early period of underperformance into an opportunity to work closely together, further refine strategic direction and — most important — build trust and reset where necessary. When they recognise that they're in this stage, directors are more likely to remain calm, support the agreed-upon direction and not encourage management to take action for action's sake.
High-performing CEOs told us that full transparency with the board, the leadership team and investors helped them navigate the second year. They gathered valuable feedback and proactively sought one-on-one conversations to increase buy-in. Boards should ask critical questions during this period, but they should do so constructively and supportively.
YEARS 3 TO 5: THE RECOVERY
If they survive the sophomore slump, most CEOs enter a period of favourable tailwinds. Their moves in the first two years begin paying off. The board has had a front-row seat for the CEO's handling of the slump; investors can see positive outcomes and signal support.
CEOs in this stage are working hard for the future. By now their imprint is all over the organization: The strategic direction is set, the organizational culture continues to evolve and positive board dynamics have been established. For some CEOs, this is an ideal time to pursue opportunities for mergers and acquisitions. It's also when they experiment with ideas and plant the seeds for new initiatives.
Toward the end of this stage, CEOs risk developing a blind spot. Confidence can turn into overconfidence, particularly if they've had several years of high performance.
YEARS 6 TO 10: THE COMPLACENCY TRAP
The recovery period is often followed by a time of prolonged stagnation and mediocre results. Performance may not be outright negative, but CEOs tend to struggle to deliver at the level of earlier years. Unsure whether a poor year signals major problems on the horizon, some boards delay intervening, whereas others act quickly to remove a CEO.
As CEOs enter this stage, the risk of complacency is high — at the CEO, board and organizational levels. Now that they're sitting firm in the saddle, some relax their grip. Some become overinvolved in outside activities — boards, speeches, charities — and are distracted from work.
CEOs who outperform in this stage recognise the need for reinvention. They stay focused on the business and continue to question the status quo. In contrast, some leaders adopt an "If it ain't broke, don't fix it" mentality and fail to sufficiently rethink strategy. Even when the CEO recognises the need to pivot, inertia on the board can slow or prevent change. Uncertainty about what and how to change can drag out the process, perhaps until it's too late.
For boards, the onset of the complacency trap presents a crucial question: Is our CEO a sprinter or a marathoner? Directors grapple with whether to bring in someone new or commit to a long-term vision with the incumbent.
YEARS 11 TO 15: THE GOLDEN YEARS
CEOs who survive the complacency trap typically go on to experience some of their best value-creating years. Their long-term commitment and ability to reinvent themselves and the company are coming to fruition. Some CEOs described a flywheel effect: Projects and investments that produced no results early on were finally paying off.
By now boards' additional trust in their CEOs has proved to be warranted. The CEOs have gained deep institutional knowledge, led through business cycles and mastered several crises. The likelihood that one good year will be followed by another steadily increases.
In this stage, the timing of succession becomes a key question for boards and CEOs. High-performing CEOs often have more discretion about when to step down. Although companies and investors benefit from having a high-performing, long-term CEO, it can complicate succession planning.
Written by: Lieke ten Brummelhuis and Jeffrey H. Greenhaus
© 2019 Harvard Business School Publishing Corp. Distributed by The New York Times Licensing Group