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Why CEOs fail

Leadership + Management

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Long-lasting iconic leaders are the exception rather than the rule, says Michael Jarrett, Senior Affiliate Professor of Organisational Behaviour at Insead. And indeed, the average tenure of a CEO of a company in the S&P 500 index is now around five years, a drop of 20 per cent since 2013.

Those CEO failures are believed to be due to simple incompetence, rigidity, hubris or narcissism. Jarrett argues though that the “singularity hypothesis”, that it’s all down to the iconic man or woman at the top, is a myth. “The reality is that much of a CEO’s success or failure can be ascribed to context”, he argues and outlines six factors that contribute to the CEO’s success or failure:

1. Tendency to grow stale in the saddle

As Donald Hambrick of Pennsylvania State University argues, long-tenured CEOs tend to grow “stale in the saddle”. The longer a leader stays in the top job, the lower are the returns to shareholders. New CEOs, on the other hand, tend to be more open to change and gain more returns. The fact that the average S&P 500 CEO tenure length has fallen to five years is consistent with this.

2. Response to stress and success

A string of successes or a good early start can fuel CEO narcissism and hubris. This has two possible consequences. One is more risky behaviour, the other is complacency.

3. Top management team problems

Top management teams can undermine CEOs despite their best efforts to keep them together. A team that works well is aligned on goals, shares information and makes joint decisions. Fragmentation arises when leadership teams are misaligned, intergroup hostility grows and formal structures start to break down.

4. Poor performance

There are CEOs who cannot respond to a changing economy, digitalisation, competition and evolving customer demands in a timely and efficient manner. Still, there is corporate inertia. It is the CEOs’ job to inspire their team with a vision and simultaneously read the landscape to capitalise on emerging trends. While this is a necessary condition, it is not sufficient if the organisation does not buy into change.

5. Inadequate board vigilance

According to research, board vigilance makes a difference to shareholder return. Boards can shift the balance of power in a firm and temper CEO hubris. They can also coach their CEO by reading market change signals and tapping their invaluable networks and resources. CEOs should not ignore them, and boards should not be shy about guiding their CEO.

6. Scandal

Scandals can arise because of non-conformity to expectations (Volkswagen), financial irregularities/mis-selling (Wells Fargo), social misconduct, ethical lapses or corruption. Sometimes, it’s just bad luck. 

 

Read more on www.knowledge.insead.edu

 

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