We are in an era when more and more businesses aspire to data driven decision making. As companies strive to be more data driven, interest in AI (artificial intelligence) and Big Data is high. Yet, other smaller scale research studies that use more traditional methods also produce data that can aid decision making. However, as companies get more data from multiple sources, they face the challenge of making sense of it all. And, sometimes this can seem quite perplexing, particularly when findings from two separate data sources are contradictory.
An example of this is research into CEO tenure. The February 4, 2020 Wall Street Journal article reported on a recent study of CEO tenure in the article “Longer Now Seen as Better for Bosses’ Time in Power” by Chip Cutter. According to the article, new research by Spencer Stuart “showed that CEOs had some of their best value creating periods in years 11 to 15 on the job.” Contrasting with this, there is an earlier CEO tenure study which I blogged about several years ago. Results of that study were published in the March 2013 issue of Harvard Business Review and it found that performance was weaker if CEOs were on the job more than five years.
Why did one research study find CEOs with longer tenure (11 to 15 years) performed better, while the other found that CEOs who were on the job longer (more than five years) performed more poorly? The Wall Street Journal article discussing the more recent study seems to suggest that the difference may be associated with changes that took place over time. Like so much in today’s fast changing world, optimal CEO tenure is no longer what it was several years ago.
But, is change over time really the explanation for such different findings in the two studies of CEO tenure? After all, as I pointed out years ago in my blog post about the earlier study which found shorter tenure better, Steve Jobs had a longer tenure when he turned Apple into such a valuable company back then. In fact, Steve Jobs’ tenure back then when he achieved such outstanding performance at Apple was more like what the newer study found (best performance in years 11 to 15). Thus, even back then, when the research found shorter CEO tenure better, Steve Jobs spectacular success indicated that much longer tenure could yield the most outstanding performance.
This raises the question: was there really a shift over time in optimal CEO performance tenure? Or were top performing CEOs longer tenured even back then? Perhaps, the results back then were affected by which CEOs were included in the study. For example, did the sample back then include enough high performing CEOs, or were there fewer of them due to the impact of the great recession?
When two research studies disagree, it may very well be the case that the variable being studied—in this example CEO tenure—is not the most important variable for determining performance. Other factors, such as what a CEO does in terms of which strategy is pursued, or what kind of economic conditions the CEO faced, may be far more important for performance than CEO tenure. My 25+ years of research into business success and failure patterns finds that making strategic choices that are right for the company is crucial for outstanding performance. Those right strategic choices are generally the ones that build on company strengths and fit well.
Thus, if CEO tenure does influence performance, my research suggests that the longer tenured CEO would be likely to do better. The reason for this agrees with a point made in the Wall Street Journal article describing the newer study favoring longer tenured CEOs. The article says that a reason longer tenured CEOs perform better is their strong institutional knowledge. As I see it, institutional knowledge is crucial because it helps companies make the right strategic choices that build on strengths and fit well. Consequently, lack of institutional knowledge can impede company performance and can be a reason why CEOs hired from outside get mixed results.
However, institutional knowledge is not limited to one person or to how long someone has held a particular position. A CEO with shorter tenure in the job can have strong institutional knowledge from time spent in other positions at the company prior to advancing to the top job. Furthermore, valuable institutional knowledge can occur throughout the company and is not just limited to top executives.
Still, there is evidence that perhaps longer tenured CEOs were better performers all along, even back when the earlier study found poorer performance for CEO tenure of more than five years. Granted, other factors affecting CEO performance, such as economic conditions, did change with time. But, despite the difference in the two research studies, the additional evidence suggests that longer tenured CEOs performed far batter even back then.
This offers an important lesson for companies striving to be more data driven. Blindly picking up on one data source may or may not lead in the right direction. To make good data driven decisions, it is so important to understand the data and what it might really mean.
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