Leaders should be changed periodically

What Mark Twain said of politicians—that like diapers, they should be changed periodically — applies to business leaders as well. Exceptions apart, a healthy CEO tenure is less than 10 years. American presidency is restricted to two terms. Among Indian prime ministers — Pandit Nehru, Indira Gandhi, Rajiv Gandhi, and Manmohan Singh — all started well. After seven years in office, each of them started to lose leadership impact. There seems to be a jinx after 7-10 years. 

When leaders linger long, warning signals of reduced effectiveness begin, often increasing in intensity. Three examples from the public domain — first, the retro-tax muddle piloted by a powerful finance minister against everybody’s advice; second, the muddling bureaucratic and judicial impact on telecom AGR dues, leading to the Vodafone India misery; third, the politicisation of the police forces even as the Supreme Court wonders whether the greatest violation of human rights occurs at police stations. These examples are warning signals of rogue power and authority, which everyone can read but nobody is able to act upon. Warning signals indicate the possibility of a problem without specifying probability, rarely a Manichean choice between clear alternatives!

What about business leaders? Even after the expiry date of a leader’s effectiveness, people hesitate to challenge a powerful leader. In an earlier article, I had emphasised how important it is for a governance professional to recognise and act on ambiguous signals. Problems don’t go away. (Business Standard, Aug 29, 2019).  I had proposed a 15-point test for use by directors. (Business Standard, Nov 20, 2020). 

If directors notice recurring complaints about a leader, they must consider what to do. As Ram Charan wrote in his book, Boards That Work, “Conscientious directors can act in a professional manner by doing two things: speaking up and reaching out.”

Renault-Nissan is a recent case where the boards did not act on the warning signals. Collision Course, a new book about the rise and fall of Carlos Ghosn, revived the subject. Mr Ghosn headed three companies concurrently, Renault, Nissan, and Mitsubishi. Each remunerated him, but none was aware of the terms with others! The companies performed superbly, but Mr Ghosn became terrifyingly powerful.  Making Vijay Mallya’s 60th birthday party at Goa appear like a retreat of monks, Renault spent ^635,000 in 2014 for a Louis XIV-style party at Versailles. Directors ignored signals of aberration until the 2018 crisis overtook them. (Once, as chairman of a start-up, I had a bruising discussion with the CEO, when he flew to Mumbai from the US by first class for what he thought was an “essential 15-minute meeting”.) 
 

In a case at General Motors, the leaders reacted positively to signals. John DeLorean was a terrific engineer, who breathed new life into a staid Pontiac. He served General Motors for 17 years where gradually his behaviour became increasingly obsessive and compulsive. Top leadership curtailed his prima-donna behaviour, compelling DeLorean to quit GM. He then set up DMC, DeLorean Motor Company, where he created inter-connected problems relating to financial, drug and social malfeasance, earning him a jail sentence. He died in 2005 aged 80. Netflix has memorialised his story through a film titled Framing John DeLorean.

In the case of Martin Sorrell at WPP Group, the board acted and WPP group suffered only minor bruises. Thomas Middelhoff, long-serving CEO of Germany’s Bertelsmann, crashed his next company, Arcandor. He served a repentant jail sentence. Ravi Narain, as the long-serving leader of NSE, suffered from hubris and humiliation as written in Debashis Basu and Sucheta Dalal’s book, Absolute Power.

Metabolically and neurologically, power causes temporary brain impairment in a leader. I described this in my 2019 book, Crash. Toxic traits such as arrogance, volatility, habitual distrust, aloofness, and eccentricity appear. No leader is perfect, and the traits are not themselves dangerous; they become dangerous because of their potential to destabilise the leader, especially if an unexpected crisis hits the organisation.

I have noticed that an excessively long tenure leads to absolute authority, usually in the later phase of the leader’s time. Well-run listed companies seem to change CEOs with planned regularity: The average Hindustan Unilever tenure for CEO is six years; TCS is six years; Titan is 10 years; Tata Steel is eight years. Contrast these with the long leadership tenures at IL&FS, NSE, and Yes Bank.  At the fabled GE, Jack Welch’s two predecessors, had tenures of nine years each, while Welch had 20 years. After the recent developments at GE, there is debate whether Welch retired just before the wheels came off. 

According to the annual survey by Strategy &, the average tenure of CEOs is 6.5 years at the world’s 2,500 largest companies. There are the notable exceptions, but sensible company boards should not test received wisdom on leadership tenure.  The subject of good succession planning deserves a future column. 

The writer is an author and corporate advisor. He was Director, Tata Sons and vice chairman, Hindustan Unilever. rgopal@themindworks.me