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There is nothing more confounding in the corporate world than the ideal tenure of chief executives. Life in the corner office can be too long, too short, even cut short.
On April 10, Shikha Sharma decided to shorten her fourth term at the helm of Axis Bank by almost 30 months. When she steps down at the end of the year, she would have completed nine years. Like Sharma, Chanda Kochhar has been running ICICI Bank for almost a decade. Her term ends in March 2019 — unless the controversy over the Videocon loan expedites the process.
The long and short of CEO tenure is fascinating: while it was just last August that Vishal Sikka quit Infosys after a three-year spell, YC Deveshwar and AM Naik set new benchmarks on corporate longevity as chief executives of ITC and LT, respectively.
The emergence of star CEOs, who get repeated extensions, has brought to the fore several questions. How long should a CEO’s tenure be? Should there be a cap on the number of extensions she get? And how do boards tackle larger-than-life CEOs? Among Fortune 500 companies, the median tenure of CEOs is 4.9 years; it is about 5 years in BSE companies in India. There are, of course, exceptions like Warren Buffet and Rupert Murdoch, who have been serving as chiefs for over 60 years. In India, professional heads who rise to become the face of the company almost enjoy a free and long run.
Chaitali Mukherjee, leader, people and organisation, PricewaterhouseCoopers (PwC), says, “It is difficult to get a CEO who is good, fits the role and meets the expectations of all stakeholders. Once you get such a leader, it is difficult to oust her, unless her performance is terrible.”
Often, not having the right successor can see incumbents enjoying repeated extensions. “A leader who has been unable to groom a successor is bad for the CEO report card. In pursuit of short-term goals, no one questions this. India Inc has not done a great job in building successors, possibly because their focus is on quarterly and annual results.” All the talk about having shadow leaders and grooming successors has not quite translated into action.
A long tenure for a CEO means a whole generation of talented officers doesn’t get a jab at the top job. While there’s no ideal CEO tenure, D Shivakumar, president (corporate strategy business development), Aditya Birla Group, says, “In industries where regulation and technology change fast, it is good to get a fresh pair of CEO eyes every five years. If the CEO has a 10-year tenure there will be ups and downs and the score will even out.”
Shivakumar headed Nokia India for a decade before joining Pepsi, which, he quit in October 2017, to join the Aditya Birla Group. He believes a CEO’s tenure should be three to five years for internal candidates and at least five years for external candidates as the latter has to adjust to the new culture. “A CEO’s job is not an area sales manager’s role that you can change every two years. Besides, irrespective of the tenure, a CEO shuld be the fastest learning person in the organisation.”
With long tenures, “the risk is that the CEO becomes autocratic and starts bending rules. This is when the board has to step in for a course correction,” says Gaurav Chaubey, director, Grant Thornton India, an advisory firm.
In an era of young CEOs — Kochhar became boss at ICICI Bank at the age of 47 — the tenure rightly tends to be long. However, there is also a tendency to not let go as the afterlife of a chief executive is not as appealing. “In India, CEOs like to hang on to their positions. They don’t get into teaching or mentorship roles as these are not very glamorous,” says a C-level headhunter, who requested anonymity.
Very few corporate chiefs in India have a career beyond their domains — unlike, say, Alan Mulally, who moved from aviation to automobiles.
For India Inc, this is the right time to think about CEO tenures. “The focus has been on operations rather than on grooming talent. In pursuit of the short term, the long term has been ignored,” says Mukherjee of PwC.
All chief executives start with a three- to five-year term. Many get there when they are in their 40s, ready for a long innings. However, time and again, boards should perform the tough job of evaluating whether a CEO should stay on or step down. Which is why, the headhunter says: “Star CEOs need star boards.”
Why are Companies Unable to Replace Star CEOs
* Lack of a long-term focus on alternate leadership building
* Absence of clear-cut succession. There’s no concept of a deputy CEO
* External awards, recognition turn CEOs into brands, making it difficult to dislodge them
* Weak boards unable to tick off CEOs when performance falters