CEO Longevity

How long do CEO’s last?  Some hang on for years, pother wash out quickly. Phin Upham discusses an influential work on the topic.

William Ocasio’s essay Political Dynamics and the Circulation of Power: CEO succession in U.S. Industrial Corporations, 1960-1990, explores central structural factors that influence CEO longevity. He identified two competing frameworks with which to view CEO longevity, the model of the institutionalization of power and the model of the circulation of power. Each model has a different way of viewing CEO tenure, power accumulation, strategic maneuvering and effects of time. Thus, Ocasio teases from each model competing or complementary predictions which he then tests.

Ocasio’s argument depends on the competing logics of the institutionalization of power and the circulation of power. The institutionalization of power model posits that a leaders position will become more secure over time as his/her views become legitimated or institutionalized for those in the company, as his/her views gain momentum and are committed to, and as they consciously consolidate and perpetuate their power. Thus, a CEO ought to have greater chance at remaining in power the longer he/she has been in power. The circulation of power view posits that as the CEO’s tenure elapses, and the CEO’s time in office grows, coalitions are more likely to grow against the CEO and his/her views are more likely to be seen as old, stale, and status quo. This view stresses, after Selznick, that intra-elite conflict is a driving force for change as the CEO suffers from competency traps and becomes “stale in the saddle.” Thus, this view would hold that a CEO’s tenure in office might be inversely related to his/her chances as surviving succession struggles, and thus the CEO’s chances of remaining in his/her job.

This structuralist view of CEO tenure has some hidden presuppositions in it. To begin with, since it does not include any personality characteristics in the metrics, it is hard to say whether these different view affect different sorts of people in different way (say, politically savvy people fall under the institutionalization model while blunt CEO’s with a specific agenda fall under the circulation of power model. Secondly, nothing is said about where the CEO goes when he/she leaves or whether or not he/she left voluntarily. For example, it could be that CEO’s get tired of their hard-driving lifestyle after 5-10 years and that this represents a point of high voluntary drop out. Or, it could be that CEO’s who have been in power 5-10 years in a successful firm begin getting very lucrative offers for more attractive CEO jobs. Thus, this drop out rate is also voluntary, and also structural (to the market for CEO’s). But the question that this essay is really interested in is not the statistical drop out rate of CEO’s over time but the ability of a CEO to keep his/her job when the CEO wished to stay. If the CEO leaves voluntarily, then this record should be dropped from the sample.The problem is, of course, that the differences between voluntary and involuntary drop out might be hard to detect since CEO’s might “resign” to save face when they were in fact “fired.”

Ocasio differentiates between these two models by construing competing and complementary hypothesis. He begins by showing that tenure in office for a CEO will decrease he rate of CEO succession in the institutionalization model and increase the rate of CEO succession in the circulation of power model. Furthermore, he posits, bad economic times or performance tends to put more pressure on CEO’s and this ought toexacerbate their ability to stay or leave. Institutionalization model, the accumulated power of the CEO ought to help buffer him/her during this time, whereas in the circulation of power model, this pressure ought to exacerbate the challenges to the CEO’s power and undermine confidence in the CEO. Lastly, he posits that board tenure will inversely affect the later model, and conversely affect the former. Other hypothesis formulated by Ocasio are dovetailed in the predictions of the two models. They include the relationship between inside/outside board members and CEO tenure, as well as various interaction affects.

Ocasio uses 120 randomly sampled industrial corporations from the Moody’s Industrial Directory for 1980, accounting for 4.45 percent of the population. Company years of 1960-1990 were used, causing 6 of the firms to be dropped due to lack of data, resulting in n=114.Ocasio uses many statistical tricks to left and right center the data such that the affects of beginning in 1960 and ending in 1980 do not shift the data one way or another. At the same time, he preserves as much of the data as possible. Control variables for firm sixe, as well as basic factual characteristics of CEO are used.For example, a CEO’s age until 60 is treated on way, from 60-63 another, and 64 and up, the CEO is excluded from sample. This is in order to eliminate age affects from the results. He uses ROA, adjusted for industry performance, to measure firm performance (H2a and b, H3a and b). Using continuous history analysis, Ocasio varies K, the gamma-shape parameter, in order to generate multiple models. Ocasio presents exceptionally clear logic to his data analysis and assumptions, though the granularity of his description is very fine at times. He presents the data in various formats with succinct explanations of the significant effects.

His results come up with the very elegant conclusion that circulation of power logic is dominant during the first decade of tenure, but that beyond that the CEO begins to cement his position in a way similar to that described in the consolidation of power model. This held for 2b and b and 3a and b as well. It was found that during times of adversity, a CEO’s prior board experience rather than being an asset was a liability. This surprising result warrants further testing.The nature and stability of the CEO’s tenure is discussed in this study in an illuminating way, and the data analysis is remarkably clear and rigorous. It highlights the dynamics between the obsolescence of the CEO’s schemas and strategies over time and the attempts of the CEO to cement his own power. It discusses the mitigating affects of high board umber and internal board members (which, surprisingly, during times of economic adversity, were a liability to the CEO rather than a support) with the interaction affects of performance.

Samuel Phineas Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania).  Phin is a Term Member of the Council on Foreign Relations.  He can be reached atphin@phinupham.com.