The Fall of Icarus, Andrew Johnstone, Cadogan Contemporary London www.cadogancontemporary.com
Ideas for Leaders #007

Why Do CEOs Fail? How the Mighty Are Fallen

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Key Concept

In the past year, the average tenure of a CEO has halved. This is, of course, worrying news for top leadership teams and CEOs want to know, how can they ensure their roles are secure? Well, there is no magic formula to guarantee that; but, remaining aware of the factors (endogenous and exogenous) that have been shown to contribute to CEO failure can help them be better equipped to succeed.

Idea Summary

What are the patterns and signs that relate to how failure at the C-Suite level can be prevented? Well, there is no consensus as to what constitutes ‘failure’, but nevertheless this Idea does shed some light on the obscure circumstances surrounding CEO performance.

‘CEO failure’ can be broadly described as “the inability of a CEO to meet the expectations of the board of directors, the shareholders and the market, leading to dismissal.” Two variables in particular can precipitate the fall of a CEO: endogenous and exogenous variables - the former being those a CEO may, to some extent, influence while the latter are given. Both may also blend with and influence one another.

Endogenous variables can include the following:

  • Executive pay: an important variable and a hot topic in today’s economic climate. Although they are not responsible for their companies’ executive pay policies, CEOs have a duty to respect the spirit in which those policies were conceived.
  • Stock ownership: this is a more complicated variable, which will not always prevent CEO failure. Perverse incentives can reverse the alignment of the interests of managers with those of the company’s owners.
  • CEO power over the board of directors: there is a divergence of views on this; some researchers consider having more influence over the body that can dismiss them protects CEOs. Others believe investor opinion is more important and giving CEOs too much power can prevent proper control.
  • Professional background: a CEOs “insider” or “outsider” status can also determine dismissal. An outsider is someone who did not work for the company before becoming a CEO, and most researchers agree that such CEOs are less likely to institutionalize their power and achieve outstanding results.
  • Competencies: this is one of the most important endogenous causes of CEO failure. Though the competency factor is difficult to measure, a meteoric riser within a company may not have the time to acquire one of the basic competencies of any CEO—people management.

Exogenous variables include the following:

  • Board composition: the more outside directors there are, the more demanding a board is likely to be. As such, CEOs that lead companies that have a majority of outside directors need to be prepared for a relatively strict appraisal.
  • Board size: large boards with many members are more likely to divide into interest groups—another red flag for CEOs.
  • Director’s commitment to their board duties: the more dedicated and demanding a board is, the more likely it is CEO failure will occur, especially if putting effort into being directors is their principal or only task.
  • Company and industry characteristics: CEO dismissals may be more common in small companies with insider CEOs. On the other hand, some researchers also argue that CEO turnover is higher in large corporations where the separation of powers is more institutionalized.
  • The influence of the predecessor: if a CEO’s predecessor was a great success, he/she may languish in the shadow of a glorious past, and directors and manager may be more loyal to their old boss that to a new one.

Business Application

There is “no magic list” of rules for guaranteed success and it can’t be said for sure exactly what causes CEO failure; however, knowing the factors that potentially contribute the most to failure (outlined above) will make CEOs better equipped to succeed.

Parting gestures will be remembered, and in the event that a CEO faces succession, leave with your head held high. Two specific ways of doing so are as follows:

  1. Share information with your successor; and
  2. Boost the successor’s authority.
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Authors

Institutions

Source

Idea conceived

  • 2010

Idea posted

  • January 2013

DOI number

10.13007/007

Subject

Real Time Analytics