Surprise — CEO Tenures are Increasing

The job of the CEO is consuming and perilous. Headlines trumpet CEO retirements, successions, and transitions seemingly on a daily basis (e.g., Google returns 17.3 million results to “2016 CEO Ouster”).

If I were to ask you to guess the average tenure of a major public company chief executive officer in the U.S., what would you say? If you’re like many who think about corporate governance, the CEO role, and business generally, you’d probably guess 5 years, maybe 7.

But in fact, the average tenure (total time from beginning to the end of their roles) for CEOs among the S&P 500 is just over 9 years*. And despite the increased challenges from globalization, technology-driven transformation, political upheaval, increased M&A activity, and shareholder activism, CEO tenures are increasing fairly dramatically.

Contrary to common perception that the market has become less patient with public company CEOs, for S&P 500 chief executives, the average total tenure has increased 35%, from 6.79 years in 2004, to 9.20 in 2016. Much of the increase came from boards sticking with their CEOs after the 2008 financial crisis. And tenures have continued to increase, rising 30% since 2010. 

Among the driving forces for the expanding tenures are a stable to slightly improving U.S. economy, boards deciding that the familiar is often preferable to the unknown, and more aligned performance management of CEOs by boards of directors. As of a couple of years ago, in a fairly dramatic shift in how boards oversee the performance of their CEO, the majority of public companies now delegate CEO performance oversight to the board’s compensation committee. This enables a smaller group than the full board of directors to monitor CEO performance on a more granular level.

The above data is for the CEOs who have completed their tenures. How about for those currently in situ? Within S&P 500 companies, the average CEO served an average of 8.1 years as of 2015, and 6.0 years at the median, according to research firm, Equilar[1]. In 2005, those figures were 6.6 and 5.2, respectively.  

IMPLICATIONS OF THE INCREASE IN CEO TENURES

What are the implications of the trend to longer CEO tenures?

For the board director:

• With more time to plan for a CEO succession, boards can and should get started early to ensure a healthy transition.  You should always have an emergency succession plan (that is the “name in the envelope” but also the point-by-point action and communications plan ready). But in the likely case that your CEO can be expected to stay in the seat for some 9 years, you should be looking to your bench not only for the next 3 to 5 years, but for 7 to 10 as well.  When it comes to succession planning, do your logical successors, whether COO, business unit presidents, or perhaps CFO, have 7 to 10 years of runway after the projected tenure of your incumbent?  How deep is your next generation of leadership and how well do you know them?  

For the aspiring CEO:

• Understand that careers and CEO tenures are lasting longer, so patience will be key. If you are next in line to be CEO, or even multiple roles removed, do you have 9 years of runway, health, and energy to assume the most challenging of corporate roles?  How strongly can you make a long-term commitment to the company and the role? Throughout your career, it is unlikely that you held any single role for 9 or more years, but this is today’s lengthy reality of the CEO commitment.

In our next post in the Patterns of CEO Success(ion) series, we will compare and contrast the experiences of insider and outsider CEOs.

*Note: The average tenures above do not include the Founder CEOs from the data set, of which there were 49, as their exceedingly long tenures increased the averages. Including the founder CEOs in the analysis results in an average tenure of 7.99 in 2004, 8.78 in 2010 and the same 9.20 for 2016 (no Founder CEOs departed in 2016). We focused on the data set without the founders for this chart as we felt it is more relevant to board members and aspiring CEOs.

[1] https://www.equilar.com/blogs/144-change-with-tenure.html.