Having a CEO around for a long time is often thought to provide a company with consistency. But it can also store up problems, according to new research.
Academics looking into the fall-out from a CEO with a long tenure find that it can “harm” performance, even after they are replaced.
Statistical analysis by a team of academics finds that it appears hard to maintain performance after a long-standing CEO has moved on. There are also higher costs involved with the “clean-up”—restructuring and write offs—after veteran chief executives have departed.
According to Gonul Colak of the University of Sussex and Eva Liljeblom of the Hanken School of Economics in Helsinki, stock returns and return on assets take “much longer to recover their peak levels observed in the few years prior to” a CEO’s exit.
There are further troubles. In the years after a departure, the “clean-ups” involve “significantly larger divestment and restructuring costs.
And new CEOs tend towards “big baths”. “We show that the new CEOs that follow a long-tenured predecessor tend to conduct an economically larger and more severe form of earnings management: namely, asset write-offs. More drastic changes seem necessary to wipe the slate clean after a long-tenured CEO.”
Seven years’ bad luck?
The research duo looked at 2,428 CEO turnover events between 1993 and 2013, using seven years as their threshold for selecting long-serving business leaders.
They found that after short-term CEOs moved, stock prices appreciated by an average of 2.7% over the following 36 months. But when a long-serving chief moves on, stock value declines by an average of 11.8%.
However, the stock value might be falling, but the values of sales and assets is usually rising.
“Taken as a whole, the pattern points to efforts by successors of long-tenured CEOs to increase sales even though the current productivity and performance of the firm is suffering,” Colak and Liljeblom write.
The results offers some insight on what boards and investors can expect as trade-offs when they change leaders.
In autumn last year, Russell Reynolds Associates, a headhunting firm, said CEO turnover in the FTSE 350 during 2022 increased dramatically after two years of lower rates caused by the pandemic.
Settled CEOs sticking around during a time of crisis chimes with other research which finds that boards want “powerful” CEOs during tough periods.
Indeed, many sources have speculated that business is on the cusp of a great wave of succession. Meanwhile, Bob Iger’s return to lead Disney have many appointing signalling that CEO retirements are a “thing of the past” .
Whatever trends are under way, one thing seems certain: boards have to contend with consequences after a long-standing CEO departs—and many of these consequences may not be good.