As Deutsche Bank’s CEO John Cryan just discovered, job security is not one of the perks of senior leadership.
Deutsche’s board just fired the British banker after the company reported its third consecutive year of losses. This wasn’t a quiet word asking him to bow out in six month’s time either – it was a full-on, you-have-15-minutes-to-clear-your-desk sacking (well, three weeks). Cryan is officially history, and Deutsche Bank has its fourth CEO in six years.
Sometimes, you’ve got to know when to cut your losses. If a leader is failing badly, the board needs to replace them. But that comes at a cost.
Long-term success cannot be achieved if you keep changing the CEO. Short tenures incentivise quick wins, not deep transformations, especially when it comes to something as difficult as organisational culture. Continuously changing chief executives can leave a company directionless and dejected.
The problem is that it’s not always obvious when the trade-off is worth it. A CEO’s personal performance is deeply entangled with the performance of the company, but they aren’t the same thing. Losses don’t necessarily mean that the CEO is playing badly with the hand he or she has been dealt.
There's more to life than the share price
Yet far too often, says business woman and author Margaret Heffernan, CEOs of public companies are judged primarily by the numbers.
‘You get everybody saying we should be more long term in our thinking, but the minute you get some bad numbers the cry goes up to throw the bum out,’ says Heffernan. ‘What makes me uncomfortable about the Deutsche Bank situation is that the focus is so much on the stock price and not what the bank is doing differently.
‘The idea that anybody should be measured on a single metric is obviously nuts. The danger is that people take the numbers as a report card, they think it means everything. It means something but it never means everything. We’ve seen companies whose stock price has done wonderfully that have turned out to be absolutely rotten to the core,’ she adds.
As a result, firing the CEO usually says as much about the board as it does about the CEO themselves. After all, it’s the board that hires the CEO and agrees the strategy, and it’s the board that determines how to measure performance against that strategy. If they understand that performance in terms of something as volatile as the stock price, it’s hardly surprising they’ll get trigger happy with the CEO’s job.
Play the long game
Effective boards take a more balanced and patient approach. In a recent conversation with MT, Harvard Business School professor Robert Kaplan spoke of how oil giant Exxon Mobil ties half of its senior executives’ long-term incentive plan to the company’s performance ten years down the line, to account for the commodities cycle and incentivise long-term thinking.
‘What do you think that CEO is thinking about a year or two before he retires? Who’s going to replace him and will that person be generating returns for the next ten years,’ Kaplan said.
If boards expect long-term thinking from their CEOs, then they will have to apply this same discipline to themselves, even – indeed especially – when results disappoint.
‘If they agreed to back the strategy and it appears to be achieving its aims, then they have to back the period of time that the strategy was going to take, not chicken out,’ says Heffernan. ‘And if they jointly commit to a long term strategy and now they don’t like it, who should be fired, the CEO or them?’
Sometimes, as guardians of the long-term interests of the company, boards will need to sack the CEO. Whether that was the case at Deutsche Bank will no doubt remain a matter of debate, though given the high-profile spat over the last few weeks, something needed to give.
But if the relationship between the board and the chief executive is healthy – and the expectations clear about how success will be measured – then it's a situation that shouldn’t happen often.
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