HOW TO KNOW WHEN IT'S TIME FOR YOUR CEO TO GO

IT'S EASY TO TELL when some things have expired. Stock options. Eggs. Prescription meds. Credit cards. But corporate America has long been stumped trying to find a more elusive expiration date: How can a company know when it's time for a CEO to go? Anecdotes fall all over the map.

- GEOFF COLVIN

Warren Buffett, the longest-tenured CEO in the Fortune 500, has been running Berkshire Hathaway for 54 years, and the stock is still hitting new highs. By contrast, Fred Kindle needed only three years as CEO (2005-2008) to turn around venerable but money-losing Swiss industrial conglomerate ABB and deliver shareholders a 262% total return.

Between those two extremes, many boards default to the mean. The S&P 500 average is 9.2 years, and despite occasional articles exclaiming that CEO tenures are shortening, they aren't; over the past 20 years they've held fairly stable. Robert Stark, a succession expert at Spencer Stuart, believes it's possible that "the average in and of itself becomes a self-fulfilling prophecy. In the absence of any good insight about how long CEOs should serve, they think, 'Oh, I should be about average."

But those who study CEOs for a living appear to have homed in on more precise answers-and discovered that the expiration date often arrives just when CEOs have reached that stage where they seem strongest. A 2021 study by researchers from Boston University, the University of Cologne, the University of St. Gallen, and the Karlsruhe Institute of Technology examined S&P 1500 companies over 25 years and found that on average, a company's value peaks and plateaus around the CEO's 10th year in the job. After 14 years or so the firm's value starts to fall, at first by a little, then by a lot, and it keeps declining for as long as the CEO holds on.

To check their findings, the researchers conducted a clever, if morbid, test: How do investors respond to news that the CEO has suddenly died? The data showed that investors consider such an event bad news for the company if the CEO has held the job for 13 years or less. But when the CEO has been there longer than 13 years, investors bid the stock up on the news of a sudden demise; they're saying the company is better off with the old coot gone.