CEO term limits create uncertainty. While it is clear that a CEO getting limited out cannot continue in place, it’s not clear who is taking their place. Deloitte’s board of directors has chosen to accelerate that uncertainty by not nominating its CEO, Cathy Engelbert, for a second term. The whole concept raises questions about the pros and cons of term limits. This article makes the case for defined terms without limits striking just the right balance between stability and accountability.
As I’ve said throughout this series, executive onboarding is the key to accelerating success and reducing risk in a new job. People generally fail in new executive roles because of poor fit, poor delivery or poor adjustment to a change down the road. They accelerate success by 1) getting a head start, 2) managing the message, 3) setting direction and building the team and 4) sustaining momentum and delivering results. In Deloitte’s case, they are choosing to manufacture a change down the road to force the organization to adjust.
Most CEOs have employment contracts. They are two-edged swords for all involved. For the most part they guarantee a CEO a set amount of compensation over a set period of time or a known compensation if the organization decides to terminate the contract early. On the other hand, there’s no guarantee that the organization will renew the contract at the end of the period.
The organization has the opposite perspective. On the one hand, they are committed to paying the CEO during the term of the contract, but can simply not renew the contract at the end of the period with no additional severance costs. In practice, most organizations renew CEOs’ contracts indefinitely – with no term limits.
Deloitte has a different approach. Its partners elect a CEO every four years for a term of four years. Each CEO can serve a maximum of two terms for eight years in total. This forces a change at the top and ensures different leaders with different perspectives over time.
And that is the main advantage – ensuring fresh perspective.
The main disadvantage is in forcing a change which, in some circumstances, may be exactly the wrong thing to do. Changing leadership in the middle of a major transformation is generally unproductively disruptive.
We can think about three broad options:
- Indefinite tenures.
- Defined terms without limits.
- Terms with limits.
It’s a Goldilocks case. Indefinite tenures may be too warm and fuzzy. Terms with limits may be too cold and harsh. Defined terms without limits may be just right.
They strike just the right balance between stability and accountability. Stability is a good thing for all. Change is stressful. Dealing with the unknown is stressful. Forcing a change where no change is warranted is the worst of all cases. Those that disagree with a CEO’s policies can hide their heads and wait for the end of the CEO’s term. Conversely, if the CEO is not going to get forced out without good reason, those same people will have to get onboard with the CEO’s policies or leave.
Accountability is also a good thing for all. CEOs make critical choices in running the business. A defined term propels the CEO and board to agree on a set of deliverables during the course of that term. A CEO that delivers on expectations earns another term. A CEO that does not deliver does not deserve another term. Defined terms break the inertial expectation of continued service by the CEO – no matter what.
That’s the problem with indefinite tenures. There’s no moment in time for the whole board to stop and consider the CEO’s progress. Terms with limits create the same situation by taking the decision away from the board.
Net, indefinite tenures are warm and fuzzy, but don’t drive results as deliberately as they could. Terms with limits give lame duck CEOs a bias to maximize short-term results during their tenures instead of building the capabilities required to deliver results over time.