The CEO Revolving Door

Call it, if you will, my Jerry Maguire moment.

Last year I switched on a television in my hotel room and found commentators gleefully advancing the idea that Vikram Pandit might shortly be run out of the chief executive's suite at Citigroup (C). Pandit had taken the helm during Citi's historic slide in 2008, and now he had become a lightning rod for critics in Congress. Many thought Citi's problems exceeded Pandit's ability to solve them. The press was dismissing him as "the most powerless powerful man on Wall Street," and conjectured that his board was only keeping him for the moment because they couldn't find anybody else to take the job.

Normally this might mean an exciting opportunity for my firm. My colleagues and I recruit chief executives for companies that need them. Our business thrives when companies need help assessing the effectiveness of their leadership or finding new leadership. The more challenging the assignment—bringing in a new leader in the midst of a crisis, for example—the more essential we are.

But I, too, was a relatively new chief executive. I hadn't held my company's top spot for much longer than Pandit had his. And I found the melee over his tenure discouraging. Pandit had ascended to Citi's highest position in December 2007 after leading an investigation into the bank's enormous losses in the subprime mortgage market. Now he was lobbying to keep his job. "I don't want to leave," Pandit had insisted to the press, "until the job is done."

Is this, I wondered, what it has come to? A talented engineer and financier reportedly hired at a cost of $165 million, promoted to chief executive, then just over a year later reduced to begging for more time to do his job. The potential waste was troubling.

"Short Term-ism"

The patterns repeat. Apple (AAPL) Chief Operating Officer Tim Cook, a veteran elevated to cover temporarily during Steve Jobs' medical leave in 2009, was greeted by critics eager to explain that Cook wasn't, well, Steve Jobs. More recently, Yahoo! (YHOO) Chief Executive Officer Carol Bartz has been criticized for not lifting that company's fortunes. Bartz is new to the company and has only held her job for two years.

The desire to quickly weed out poor performers is admirable, but the excesses have created a distressing side effect: "short term-ism." It defies common sense. It has produced poor results for shareholders, weakened companies, and hurt the economy.

Consider a few numbers from Booz & Co., which tracks chief executive succession at the 2,500 largest companies in the world. In 1995, barely one in every 10 American companies replaced its chief executive. In the 2000s, the frequency leapt to more than one in seven. The portion of the departing corporate heads dismissed for poor performance exploded, by a factor of four. Pity chief executives in the telecom industry, where outright dismissals account for more than half of all departures.

I'm all for good corporate governance. But why haven't all those performance-related firings lifted the Standard & Poor's 500-stock index past its level from January 2000? What's wrong?

Culture of Impatience

I blame a culture of impatience. Business readers have snapped up 500,000 copies of a book called The First 90 Days, by Dr. Michael Watkins, who has served as a professor at the Harvard Kennedy School and Harvard Business School. And since Franklin D. Roosevelt's days, voters have thrilled to hear politicians describe all they will achieve in their "first 100 days." It makes for entertaining reading or political theater. But as for substance, it's as thin as spun sugar. The Depression, after all, continued for years after Roosevelt's famed 100 days.

General Electric's (GE) Jack Welch has argued it takes five years for a chief executive to develop a proper understanding of his company. GE has had just four chief executives since 1970.

Given that large corporations in the U.S. often get more than half of their revenues from overseas, I think Welch's five-year time line is reasonable. Very simply, it can take that long to physically reach a far-flung network of overseas offices or factories and cultivate real relationships with managers in them. Yet we see chief executives run out before they've had time to develop and implement strategic plans that were supposed to carry forward for a decade. I think many can rightly claim they were sent packing too soon.

Ironically, when boards of directors hire us to find a new chief executive, we're often asked to "go get a Jack Welch." Welch was an insider, but no matter. It's a perfectly fair demand. Still, frequently we study our clients' needs and propose an alternative. "Consider this less visible professional," we tell them. "He or she may simply be a better match for your needs."

Outsider vs. Insider

The famous recruit from outside the company or outside the industry, we explain, may be a poor fit regardless of his or her remarkable skills. Chemistry and culture are difficult to predict, which is what makes what we do so important.

Sometimes you can defeat short term-ism simply by hiring an insider. When we assess our recruits, we believe insider candidates may have an advantage. For an outsider to compare favorably to an insider, he or she must have a record of creating value stronger than the insider's.

A board that wants to make a big splash for shareholders often prefers the risky outsider to the insider. This strategy works—an oft-cited example is Ford Motor's (F) Alan Mulally, recruited from Boeing (BA) in 2006—but we should expect it to take longer than two or three years to garner meaningful results. On Mulally's second anniversary at Ford, the company's share price equaled half of what it was the day he started. On his third anniversary, it still hadn't risen back to par. Only now, as he enters his fifth year at the company, is Mulally delivering the big returns shareholders dreamed of when he assumed the CEO role.

Maybe we need to develop some patience. More than a year has passed since the rumors started flying that Vikram Pandit was headed for the door, and he's still at the company. Though we'd be happy to help Citi find his successor, it's heartening to see Citi values continuity of tenure.