Are Short CEO Tenures the Reason Companies Don't See Industry Disruptions Coming?

Posted by Leonard Fuld on Dec 2, 2014 10:00:00 AM


Organizations are not allowing CEOs to fulfill a big part of their mission: To help their firms avoid major long-term disruptions and potentially catastrophic failure. The key to fixing this problem is to ensure CEOs integrate the long-term plan into everyday operations, as well as give CEOs a long-enough tenure to execute their plans.

As it stands today, why should CEOs in many instances with an average tenure of half dozen years spend their time on multi-decade challenges that far exceed their stewardship?

During a question-and-answer period at a recent talk I gave about anticipating long-term disruptions, one individual asked a simple but enlightening question that broke open this very corporate soul-searching issue: He asked, “And why should they care about the next decade? CEOs receive incentives that are relatively short term and the public companies they run have to answer to investors each quarter.”

Coincidentally, this past summer I interviewed a series of big-company C-level executives about their strategic horizons. Nearly every CEO, COO, CFO or CMO I spoke with said their strategic horizon projected out no more than three to five years. That was the practical limit for them. The reasons they gave made sense and were generally based on industry cycles. A couple of CEOs said that their industry standards change roughly in five-year periods. Another cited the fact that dramatic new product developments seem to emerge every three to five years. Those are all reasonable answers but they ignore the great, devastating industry shocks that do not follow a normal industry cycle. Just look at the various oil shocks and US automakers, the iPhone or smart phones in general and Nokia or Blackberry’s miss here, or digital photography and Kodak.

A longer tenure is just part-one of the solution. It gives the CEO time. Part-two has to do with how CEOs manage that time, manage the long-term, and protect a company against disruptions.

McKinsey consultant, Mehrdad Baghai, outlined in his book, The Alchemy of Growth, the reasons CEOs need to constantly see this long-term goal and act upon it each and every day. According to Baghai, management must simultaneously work on three distinct but complementary time horizons in order to manage their overall business portfolio: Incubating the new business (Horizon 3), Horizon 2 on-boarding the next generation of high-growth opportunities, to Horizon 1, managing the short-term, the current fiscal year. I believe where many CEOs and their managements fail is accomplishing Horizon 2. That is, CEOs may pose the future opportunity but then do not on-board the new opportunities (Horizon 2). One likely reason for this is their short tenure.

I’m not sure it is realistic for me to advocate for long-term CEO tenures (this has been a subject for lots of board room debate for many years) but let me tilt at windmills for a moment and consider the benefits of extending CEOs’ terms. At least in a few cases such commanding CEO lifers have looked at the far horizon and managed their firms across the second horizon outlined by Baghai. Recently retired Daniel Vasella, CEO of Novartis for nearly two decades was one of them.

Vasella was one of the first pharma CEOs to embrace the threat of generics by entering that market, seeing this next generation opportunity and at the same time helping Novartis overcome a perceived existential danger. He also massively expanded the company’s R&D in “smart” therapeutic classes, making Novartis one of the most successful life sciences companies of all time.

When I interviewed Vasella, years before his retirement, he commented on how he saw long-term and short-term horizons as one continuum.

“Of course everything we do (or don’t do) today impacts the long-term in some way,” Vasella stated. “I am constantly asking myself: Where do we want to be? What do we have to do in order to get there? And when?

He regularly “bit checked” his future strategy by roaming Novartis’ labs, as well as speaking with politicians and industry thought leaders on their opinions and insights. In doing so, he made sure to adjust for second horizon as he moved his plans to the first horizon.

“One has to have a base case, a strategic plan base case, outlining the objectives, direction and actions.  Then you must account for negative or positive events, to elaborate possible strategies that go beyond this base case,” he commented on how he made the adjustments.

“The planning is structured, but it needs to have flexibility.”

In effect he supported Bahgai’s assertion that management must simultaneously plant the seeds for the long term while executing today’s business.

At the end of the day, tracking potential disruptions falls squarely within management’s jurisdiction. The question therefore remains: Are CEOs given the incentive or are they even prepared to manage this process? I would suggest that the answer is a bit of “yes,” and “no.” Yes, it is their job and yes they may even lay out the plans for future options. The reality, though, indicates that “no”, overall CEOs often are not fulfilling their long-view responsibilities.

By giving CEOs the time they need, they could leave their companies with the legacy of watching the far horizon and integrating lessons learned into management’s everyday planning activities – long after their departure.

Topics: Competitive Intelligence, Early Warning Monitoring, Scenario Analysis

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