By Diane Brady
A good CEO is hard to find. That may explain why the average tenure of chief executives among companies in the S&P 500 lasts about four years. It also explains why boards and shareholders sometimes let CEOs who initially show positive results hang around for years, if not decades, in the top job.
Therein lies a problem. For example, Disney's (DIS ) Michael Eisner and American International Group's (AIG ) Hank Greenberg won regard as top performers for years, only to come under scrutiny as a growing chorus of critics complained they had overstayed their welcome. Almost 20% of CEOs in the S&P 500 have been on the job more than 10 years, with about 5% lingering for more than 21 years. Although some senior execs surely are doing a terrific job leading the company, investors should acquaint themselves with the perils of having someone hanging on to the helm for too long.
HEELS DIG IN.
The risk involves more than the CEO simply growing stale and tired. Greenberg, for one, had more energy than men half his age. His commitment to the job impressed many observers. Unfortunately, there were some insidious side effects not immediately obvious.
Entrenched leaders have a tendency to resist succession/retirement plans. In turn, demoralized talent heads for the door, quickly denuding management ranks. The result: a power vacuum that further enhances the incumbent's influence.
Or, intractability can lead to choices that reflect the preferences of the CEO over those of the shareholders. Entrenched CEOs can breed entrenched boards, practices, and relationships that undermine the company. Critics cried for years, for example, that Disney's partnerships reflected who was in and who was out with Eisner himself.
CASH ON TAP?
Good governance advocates point to both AIG and Disney as examples of boards too slow to act in the shadow of powerful CEOs. At Disney, dissident shareholders Stanley Gold and Roy Disney now openly oppose the succession of President Robert Iger as CEO, not on the basis of his performance but because they perceive him as Eisner's choice.
Then there are the years of huge pay and stock packages, like the nearly $500 million parcel Ed Meyer received when he sold Grey Global Group to WPP Group (WPPGY ). A number of shareholders believe that some of that money should have gone to investors. Says attorney Arnold Gershon, who represents a shareholder suing the company: "The purpose of raising money from the public is not to allow those in control to enrich themselves."
In reality, decades of top-level pay packages are bound to add up. Years in power often allow managers to grow into shareholders with significant voting power. Meyer, for one, has run Grey since 1970 and accrued a huge fortune while building the company from a $29 million agency into a $1.4 billion marketing and advertising giant.
CULT OF PERSONALITY.
Meyer neither started the company nor took it public. But he controlled the voting stock and has set the tone as a leader for the past 35 years. A Grey spokesperson counters that Meyer is "the founder of the modern Grey and, during his nearly 50 years, has built it into the global powerhouse it is today."
Even among professional managers, spending too long in the top job can create a tendency to view an organization as their own shop. Grey's accomplishment became perceived as Meyer's accomplishment -- rather than a result of a great team, industry expansion, or other factors. Ditto for leaders like Eisner and Greenberg, who also didn't found the companies they ran. At times, however, they acted as if they had.
The cult of personality can run so deep that even shareholders begin to believe that the outfit can't run without the person in the top-floor suite. Greenberg allegedly warned that the stock might suffer a steep drop once he stepped down.
So what is a board to do?
First, it should draft and oversee a strong succession plan, despite opposition that might come its way. "I was accused of ageism in 2000 when I suggested that AIG needed a succession plan," says Brandon Rees, a research analyst with the investment office of the AFL-CIO, an AIG shareholder.
While Greenberg did bow to pressure by creating an office of the chairman in 2002, he gave no indication when he might leave. It took five more years, growing criticism of Greenberg's leadership, and intensifying scrutiny from regulators before the AIG board urged Greenberg to step aside as CEO.
A prime mission of every top exec is to identify and groom future leaders and give them some hope that the company really will employ their talents some day. But it is not a CEO's job to dictate the timing and circumstances of his or her own exit.
Directors also need to make sure that compensation plans are fair and nonpreferential. Not that anyone necessarily begrudges the CEO his or her right to grow wealthy. Enrichment is a given -- and often forgiven if shareholders get a piece of the pie. The danger lies in allowing one person to amass an undue concentration of power.
Greenberg not only ranks as AIG's largest individual shareholder, with almost 2% of common stock, but also controls private entities that dispense bonuses and own a larger chunk of the company. That still gives him incredible sway, even if he no longer officially sits at the helm, and makes it harder to dislodge him once the board decides his time as the chairman has expired.
The real key lies in having truly independent boards that exercise regular reviews of CEO performance. This best ensures that a company's leadership is truly effective -- and judged by the same standards that any new CEO would face. Years on the job should not guarantee future employment. Otherwise, star leaders can sometimes jeopardize their own legacies while undermining the companies they have worked so hard to build.
Brady is a senior writer for BusinessWeek