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How long does an Indian CEO stay in the corner office?

LiveMint logoLiveMint 26-09-2017 Dipti Jain

Top bosses in India’s biggest companies seldom last long enough to see more than one Cricket World Cup, shows a Mint analysis.

The analysis is based on annual reports of the 30 Sensex companies. The Sensex is a stock market bellwether index that consists of India’s largest companies.

These companies have had 53 CEOs between 2010-11 and 2016-17; 24 of these quit or were asked to go during this period. The year 2013-14 saw the highest number of CEOs quitting/being asked to go.

The analysis used a three-year rolling median average to calculate average tenures. A three-year rolling average takes care of cyclical fluctuations. And using the median instead of the mean helps insulate the results from extreme values arising from promoters holding on to CEO positions in their companies for very long periods. Eleven of 30 companies in the Sensex are led by promoters. The median tenure for exiting promoters is 21 years compared to just four years for their professional counterparts.

The median tenure of CEOs who quit or asked to go in the three years to 2016-17 was 4.1 years.

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CEOs in health and pharma companies have had the longest tenures, while those in charge of automobile companies lasted the shortest time. Cipla Ltd’s promoter Y.K. Hamied headed his company for decades (37 years) before exiting. But even a professional chief executive, Lupin Ltd’s Kamal K. Sharma had a nearly 10-year tenure before exiting. Tata Motors Ltd’s Karl Slym had the shortest tenure in the period under consideration. He died in January 2014 while holding office.

The Sensex has companies from banking and finance, automobiles, healthcare and pharmaceuticals, information technology, power, petroleum, packaged consumer goods, metals, capital goods, services, telecoms, and consumer discretionary goods sectors.

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How does India compare with the world in terms of average CEO tenures?

The average global CEO lasts five years, according to a Strategy&PwC report. Strategy& PwC is a strategy consulting firm which is part of the PwC network. The report looked at data for calendar year 2016. North American chief executives have shown an increasing trend in tenure. Tenure has been falling for those in the UK. The global tenure has been stable over recent years.

India’s overall tenure is lower than the global figure of five years. In Canada and the US CEOs have a median tenure of eight years. It is 6.5 years in Western Europe.

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These comparisons need to be read with a caveat. The PwC report is based on calendar year figures, while we use the April-March fiscal year for our calculations.

What do these numbers entail for corporate governance and business performance in India?

Commentators have argued that prolonged CEO tenures are detrimental to corporate governance concerns. Long-serving CEOs tend to concentrate too much power in their hands and discourage divergent viewpoints.

A 1991 paper by Danny Miller, visiting professor at McGill University and University of Alberta, argued that the ability of companies to adapt falls with increasing tenures of CEOs, which could lead to negative financial consequences. The paper is titled Stale in the Saddle: CEO Tenure and the Match between Organization and Environment. To be sure, Miller’s analysis is both dated and confined to North American firms.

The ability to manage the external business environment can be important asset in the Indian context where the government and politics can play a major role in business. Longer CEO tenures could help in this task.

If prolonged leadership by promoters has an adverse effect on a company’s performance, it would also corrode promoters’ own wealth. Long-serving owner-managers may want to keep this in mind.

This analysis has looked at chief executive officers, or the person who has the most impact on company direction, where the designation maybe one or a combination of chief executive officer, chairman or managing director (hereafter referred to as CEOs).

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