Know When to Fold 'Em: Why 20 Years As GE's CEO No Longer Makes Sense

Twenty years? That's almost an entire generation. Most marriages dont last that long. In the US, few people live in the same house for that length of time. And holding a job - may people have five jobs over that time span.

But running a corporation? Who can stay awake, let alone relevant.

There are probably not too many people, especially investors, who realized that GE had a kind of implicit deal with its CEOs to stay at the helm for twenty years. In fact, few of its employees, customers or suppliers were aware of it either.

Whether you think Jack Welch, the preceding CEO was good, bad or simply a bit self-promotional, the fact that one guy managed to survive that long without doing irreparable damage to the institution and to himself is hardly reason enough to believe all of his successors should do it.

In an age in which businesses frequently are born, grow and then flame out within a decade, having one leader over twice that period of time would seem to be courting disaster. Twenty years ago many of the major forces driving economic and business performance today were startups or didnt even exist (Facebook, Google, Amazon...). Entire categories were either dreams or just being born (social, mobile...).

While our penchant for disposing of leaders, employees and enterprises with almost gleeful insouciance is both wasteful and counterproductive, locking them in during a time characterized by disruption and change doesnt make much sense either. JL

John Gapper comments in the Financial Times:

Chief executives suffer from a perverse effect: the longer they stay in the job, the more popular they are with employees and the more out of touch they become with customers.

To the news that General Electric’s board of directors has been meeting in solemn conclave to debate whether its chief executives should serve a 20-year term, the natural response is: which egomaniac came up with that idea? The answer is Jack Welch, the stock market-pleasing, Fortune magazine cover-generating former chief executive, who enjoyed 20 years at GE’s helm before stepping down smartly in 2001, just as the wheels were coming off. He was succeeded by Jeff Immelt, the good soldier who has refashioned and globalised GE for the past 13 years, and been greeted with a shrug.
For GE Kremlinologists, this week’s story in The Wall Street Journal about the mythical 20-year tenure at GE (Mr Welch’s two predecessors actually lasted nine years each) is full of raw material. On one interpretation, it is merely an ingenious way to announce that Mr Immelt is tired of slogging away for no stock market reward, and is ready to step down. The dangers of a chief executive who overstays his or her welcome are clear and well documented. The boss carries on with a strategy that worked once but is outdated; seeks advice from a clique of obsequious insiders, all of whom owe him their jobs; and steadily becomes more isolated from the company’s customers and suppliers.
The real issue, less skewed by GE’s boardroom politics, is how long should a chief executive serve. The opposite danger to entrenchment of the chief executive is that companies shuffle leaders too rapidly, made trigger-happy by eagerness to adopt the private equity definition of long term (three to five years of upheaval and head for the exit).
If you come into the job knowing you probably have less than five years, there is a severe temptation not to set the best long-term course but to do something showy. Boosting the share price just long enough to make your options pay, and to take a bow before your successor arrives to repair the damage, is a better strategy for you than the company.

This approach is not yet pervasive, although chief executive tenure has fallen in the US, prompting The Conference Board corporate group to declare euphorically that “the [investor] witch hunt is over” when it rose slightly for S&P 500 bosses last year. The US tendency towards entrenchment has eased in the past decade, bringing it into line with European practice.

The average tenure of chief executives at the world’s 2,500 largest companies is about six and a half years, according to an annual survey by Strategy &, the consultancy formerly known as Booz & Co. The median, dragged down by the fact that quite a few suffer buyer’s remorse and fire new chief executives rapidly, is 4.8 years.

As it happens (I assume it is not evidence of an efficient market in corporate governance), 4.8 years is also the optimal length of time for a chief executive to remain in the job, according to an academic study last year. It tracked shareholder returns against tenure and found that those who hung around for more than a decade, such as Mr Immelt, were the class dunces.

People who get to the top tend to be both skilled and pretty fortunate, which gives them a certain level of self-confidence and makes them less open to new ways of thinking - Professor Andrew Henderson, University of Texas

Xueming Luo, a professor at Temple University and one of the study’s authors, says chief executives suffer from a perverse effect: the longer they stay in the job, the more popular they are with employees and the more out of touch they become with customers. “You become isolated from the market and the people you promote are your friends, so they lose touch, too,” he says.
The risk is evident; the question is how long it really takes for atrophy to set in. The problem with judging skill on investment returns is that the boss should focus on improving the company in the long term, not short-term crowd-pleasing. If the answer is fewer than five years, it is the wrong question.

Indeed, the research on which Prof Luo’s study builds, which found that chief executives grow into their jobs for several years before becoming stale, used operational measures such as return on assets rather than total investor returns. It concluded that bosses peak at eight to 10 years.

“People who get to the top tend to be both skilled and pretty fortunate, which gives them a certain level of self-confidence and makes them less open to new ways of thinking,” says Andrew Henderson, a professor at the University of Texas. They often tackle the challenge the company faced when they were appointed but later become stuck.
There is no set rule but seven to 10 years for a talented leader seems about right: long enough to respond to things that matter rather than shareholder noise; short enough to avoid the tempting delusions of the corporate echo chamber. Far beyond that, where Mr Welch led GE, is dodgy territory.
As well as entrenchment, it creates internal tensions. The prolonged and semi-public tournament to succeed Mr Welch became a destabilising mess, leading to Mr Immelt’s two rivals departing. Since 80 per cent of top jobs go to insiders, a boss that hangs on for two decades crushes the aspirations of at least one generation of talent.

Mr Immelt seems to realise that he is in the danger zone, along with chief executives such as John Chambers, who is approaching 20 years at Cisco. The best excuse for the GE board not having thought about all of this five years ago is the 2008 financial crisis, which led to a lot of businesses battening down the executive hatches.

Now, in the guise of a Platonic discussion about the ideal length of chief executive tenure, it is finally coming to grips with Mr Welch’s unfortunate legacy. Better late than never, I suppose.