Creating Sustained Value: Finding and Supporting Long-Term CEOs
Companies are facing market pressure to deliver short-term returns, yet a small group of CEOs have successfully focused their organizations on the long-term, while delivering results to stockholders and stakeholders alike.
Psychometric testing shows that these “long-term CEOs” are wired differently than their CEO peers. Among other traits, they’re more focused on relationship building, and have higher levels of pragmatism.
There are four specific activities for boards to undertake to support and enable a long-term CEO: Ensure CEO and board collaboration, create a sense of inclusion, establish purposeful compensation, and undertake strong external engagement.
Finding and Fostering CEOs with a Long-Term Perspective
When Jeff Bezos founded Amazon as an online bookstore in the mid-1990s, he did so with a clear vision for how he wanted to manage the enterprise. “We believe that a fundamental measure of our success will be the shareholder value we create over the long-term,” he wrote to shareholders in 1997. “This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”1
In the 20 years that followed, Bezos steadfastly maintained that long-term focus, reinvesting profits to build capacity, turning that capacity into new and innovative business lines, and reinvesting the profits from those business lines to build increased capacity and new capabilities – again, and again, and again. Amazon not only leads markets, but also creates them. What started as an online bookstore is now in the business of (among other things) television and movie production, online storage and servers, warehouse robotic systems, drones, tablets and mobile devices, online reference services, and is the first place most people turn to when shopping online for anything. Bezos is now one of the wealthiest individuals in the world, with an estimated net worth of $72 billion as of October 2016, and Amazon’s current market capitalization is over $386 billion.
Bezos is among a small group of public company CEOs who have been able to maintain a long-term focus while running their businesses. There’s nothing fundamentally unique about their markets or industries that allows them to focus so strongly on the long-term – but new research from Russell Reynolds Associates shows that there is increasing evidence that there is something unique about the CEOs themselves. And, for organizations lucky enough to be led by one of these unique leaders, there’s a clear role to play for boards of directors who want to assess, recruit, and enable them – and reap the value they create for stakeholders over the long-term.
Resisting Short-Term Temptation, and Remaining Focused on the Long-Term
A long-term perspective in business is an increasingly rare thing to find, and investors are partially to blame. Public companies frequently find themselves under pressure from many investors to deliver short-term financial results – a rising share price, or a rich dividend. As a result, executives tend to focus heavily on quarterly results. Although most companies – and leaders – have a clear vision for the future, most struggle to bring that vision alive while also providing the short-term financial returns their shareholders clamor for.
“If you look at the S&P 500, the most powerful companies in the world returned more to shareholders last year than they earned. In other words, dividends and stock buybacks were greater than retained earnings. That means companies are becoming much more cautious in how they invest and much more short-term in their thinking.”2
Martin Sorrell, CEO, WPP
Sorrell has been running WPP since 1986. Since inception, he has grown revenue to £12.2 billion, and net
income to £1.1 billion.
In the wake of the Great Recession, there is increasingly a call for companies to take a long-term perspective. For those that advocate it, this movement towards “long-termism” holds that companies should focus on thoughtful transformation across time to create sustainable value and maintain economic stability. The long-term payout, they argue, will dwarf any forgone short-term gains.
Of course, long-term and short-term goals are not necessarily mutually exclusive. But a truly long-term orientated company is patient with short-term problems and results. Good ideas are given time to grow and thrive. Organizations pursue long-term strategies while seeking out shorter term wins, rather than upending the apple cart and shifting organizational focus in response to each quarter’s financial results and the subsequent feedback from the market.
Writing in Harvard Business Review on this topic, McKinsey & Company CEO Dominic Barton proposed that “business must lead nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. This shift is not just about persistently thinking and acting with a next-generation view… It’s about rewiring the fundamental ways we govern, manage, and lead corporations.” 3
And for boards, it’s about finding a leader “wired” the same way.
“First, most CEOs truly want to run a company that creates lasting value. Second, actually doing so is an extraordinarily complex undertaking. Creating corporations that are focused on the long-term requires CEOs to think multidimensionally. They must focus on the long-term yet still demonstrate credible performance in the short term. They must hone and constantly refine a long-term strategy with their boards while persuading their teams to own that strategy – all while selling it to an array of investors who may have vastly different goals and orientations.”
Focusing Capital on the Long Term 2015 Long Term Value Summit Report4
Russell Reynolds Associates is a member of Focusing Capital on the Long-Term, an organization dedicated to developing practical tools and approaches that encourage long-term behaviors in business and investment decision-making. For more information, see FCLTGlobal.org
Hard Results Built Upon Soft Skills
Russell Reynolds Associates consultants who work closely with CEOs and boards have a clear view into the behaviors and habits of these “long-term CEOs,” and their boards, and see how they work together to fight the challenging quarter-by- quarter market focus. Their insights helped illuminate the career experiences and personality traits that differentiate the long-term CEO from the broader CEO population.
At a high level, these CEOs understand their place in the company, and the company’s place in the world. They genuinely believe their company has some weight in the world, and they think carefully about where to put it. Not surprisingly, they tend to have a global orientation, even if their business has a more geographically-limited footprint. Emmanuel Faber, CEO of multinational food producer Danone, has clearly demonstrated a bias toward using his influence, and that of the company, to benefit society. He currently co-chairs the Business and Poverty lab at HEC Paris, and chairs the Strategic Guidance Committee of the Institute for Economic and Social Development (IEDES). Faber has stated his intention to focus Danone on “strong, profitable, and sustainable growth” and appears to have done just that: In July 2016, the company announced that net profit had doubled to €880 million in the first six months of the year.
For some, there is almost a “moral” component to the drive toward the long-term. They consider it the right thing to do. By using a long-term time horizon, they are ultimately able to balance value creation and value capture, creating a return for both their shareholders and their stakeholders. Paul Polman, CEO of Unilever, is in this category. Upon taking over the global consumer goods company in January 2009, Polman pledged to double the size of the company while also reducing its environmental impact, and increasing the benefit it provides to society. As part of this effort, Polman has eliminated short-term financial targets, to keep the focus on long-term performance. The return on his efforts are starting to show: Revenue for the company was €40 billion in 2008 and grew to €53 billion in 2015, while operating income increased from €5 billion to €7.5 billion. Over the same period, CO2 emissions are down 39% per ton of production, water abstraction is down 37%, and total waste sent for disposal is down 97%.
Perhaps related to a desire to do what is right, long-term CEOs are concerned about their legacy, and want to build institutions that will stand the test of time. This typically manifests itself in efforts to build a strong brand and corporate reputation. In fact, long-term CEOs tend to manage brand and reputation as assiduously as financial performance. Often they fall into one of two camps: They either focus on revolutionizing an existing industry or market, with a clear vision of how things could be different; or they imagine markets that don’t yet exist, and see a clear path to market creation. A rare few have done both: Amazon’s Bezos is one, transforming not only retail, but adjacent and non-adjacent markets.
Indra Nooyi, CEO of PepsiCo, is an example of a CEO who sought to revolutionize an existing industry. Taking over the global food, snack, and beverage manufacturer in 2006, Nooyi sensed a changing competitive and operating environment, with a growing demand for healthier options, an increased focus on environmental impact, and a growing global transformation of the workforce. To position PepsiCo for long-term success, Nooyi put in place a program known as “Performance with Purpose.” Writing in October 2016, she described the goal as “transforming the way we do business so we can deliver strong long-term financial returns in a way that is sensitive to the needs of the world around us… From the start, we knew [it] wouldn’t be easy. We know it wouldn’t happen overnight.” It’s been a decade, but the results are clear: In addition to transforming PepsiCo’s product mix (45% of revenue today comes from low calorie drinks and healthier food products) and reducing the environmental impact of operations, operational changes have saved the company $600 million in the last five years, and Nooyi has doubled net revenue to $63 billion and delivered total shareholder return of 142 percent over the past ten years.5
To successfully lead companies like Bezos, Nooyi, and other long-term CEOs do, interpersonal skills are critical. These long-term CEOs are able to put their egos aside, focusing instead on creating a team that can work together successfully, and be greater than the sum of their parts. They tend to connect well with the people around them, building a network of strong relationships, setting the stage for clear communications and transparency, and bringing stakeholders into the fold of what they are trying to accomplish. They are well aware that long-term goals cannot be accomplished by a single person or division, and strive for open communications and collaboration across the enterprise. Notable public examples include Google CEO Sundar Pichai, who is seen as a very inclusive leader with strong people skills, and Ajaypal Singh Banga at MasterCard, who has created an open-door culture at the 10,300 person financial services firm.
Profiles of Success
Over the last two decades, Russell Reynolds Associates has built one of the most robust databases of psychometric data on corporate executives from around the world, gathering information that illuminates their leadership styles, decision making processes, and other personality attributes. Our proprietary database, including data from our partner, Hogan Assessments, has over 9,000 executive profiles, and information on over 900 CEOs.
To validate our observations on long-term CEOs, we turned to our database and identified current and former corporate CEOs for whom we had at least three years of financial performance data. This data enabled us to calculate Return on Assets to compare financial performance, and by requiring at least three years of data, we ensured we weren’t analyzing their predecessor’s results. For those CEOs who remained, we then removed any CEO who was fired during their tenure, and incorporated third-party investment analyst reports to include the market perception of who was, and wasn’t, leading with a focus on the long-term.
As would be expected given the dominance of short-term thinking among executives today, the number of long-term CEOs identified was small – just 14 – yet the difference between them and other CEOs is overwhelming clear.
We then compared an analysis of these long-term CEOs to our recent study of best-in-class CEOs, those chief executives who saw 5 percent per year revenue compound annual growth rates (CAGR) during their tenure (a rate which exceeded average gross domestic product growth).6
Not surprisingly, there are many areas in which best-in-class CEOs and long-term CEOs both differed significantly from the broader CEO population, including demonstrating greater intensity and energy, a stronger sense of the “big picture,” and a higher sense of prioritization.
Both best-in-class and long-term CEOs have traits that would lead others to describe them as being “on a mission,” combining both deep intensity and a strong sense of urgency in all that they do. They have a clear eagerness to continuously move forward and consistently demonstrate progress toward their long-term objectives. Their strong sense of ownership over their organization and work, combined with high levels of engagement, drives them forward.
They are both able to cut straight to the core of an issue, quickly seeing the difference between the signal and the noise. They are able to prioritize what is most important, and then constantly re-prioritize as their organization moves forward and their circumstances evolve. This comes about as a result of a strong focus on substance, a clarity around strategy, and a clear sense of purpose.
Yet long-term CEOs show stronger tendencies and traits in many critical areas relative to both typical CEOs and best-in-class CEOs.
First, long-term CEOs are practical. They commit to a vision or an idea, and they become incredibly resourceful in transforming that vision or idea into reality. This takes a combination of tactical persistence and an ability to adapt as circumstances change. It also requires a set of mental blinders, avoiding adjacent but ultimately unrelated ideas and distractions. Long-term CEOs act with laser focus, which enables them to systematically and practically fulfill their goals and objectives.
Second, they are outgoing. They have a tendency to be talkative, expressive, and communicative, and therefore to be active in building relationships and networks. Interestingly, they are also naturally more caring. Whether this is simply a result of being more focused on relationships, or perhaps because of their natural orientation toward issues larger than themselves, is unknown. This tendency to be outgoing is specifically helpful to long-term CEOs because they will naturally keep stakeholders engaged, informed, and connected to the work of the company.
Third, they are inclusive. When building teams, they look far and wide for the right people to bring in to the effort. They have a natural orientation toward getting people on the bus and helping them stay there. They recognize that investing in people is inherently a long-term investment, but one that that yields results. This trait enables the CEOs to build an executive team that can perform significantly better than the sum of its individual members, a critical requirement of any high-performing organization, and to help grow leaders to be even more successful over time.
Lastly, and perhaps most importantly, they demonstrate a strong sense of optimism. They expect that things will go well. Long-term CEOs have to create and execute a compelling vision, building a team that will stay engaged for the long haul. This tendency enables long-term CEOs because their followers are far more likely to join the effort, and stay involved, if they (and their leader) are optimistic about the world they are creating, and their likelihood of success.
Route to the Top
After comparing the psychometric data for our long-term CEOs against that of 900 other CEOs, we also analyzed their professional backgrounds. We found that long-term CEOs have gained a diverse array of experiences before becoming CEO. In fact, 44 percent of our long-term CEOs have cross-functional experience, as compared to 29 percent of the broader CEO population. The extent of this functional “cross-training,” particularly on the product side of the business, may give our CEOs added respect for how long it takes new products and services to come to fruition. It may also give them the ability to see the potential value in early stage activities in various parts of the organization.
Additionally, these long-term CEOs had an average tenure of 10.7 years as CEO, compared to 7.1 years for typical CEOs. While it is unclear if this long tenure is the cause, or effect, of their orientation, such long tenures may have helped them build credibility with the board and investors, allowing them to ride through short-term downfalls and understand firsthand the relationship between long-term investments and payoffs. This may also indicate a need for long-term CEOs to lead through an early period of short-term focus while in the CEO role before earning the right to shift the organization to a long-term orientation.
We also found that 64 percent of our long-term CEOs had international experience, versus 25 percent of typical CEOs – perhaps exposing them to cultures that are more long-term focused, such as Europe and Asia. They may even have seen first-hand the impact of short-term thinking in geographic regions that are struggling to build stable economies and markets, and learned what not to do.
Lastly, we discovered that entrepreneurial experience is often part of the package, perhaps because capital allocation skills are so important to long-term success. Long-term CEOs frequently have left large enterprises to start, or take early leadership roles, in new companies. This might give them exposure to new ideas and technology, the early days of new markets, or entirely different ways to organize and disrupt established enterprises.
A Critical Partnership at The Top
No successful CEO can operate in a vacuum, and long-term CEOs in particular must have the support of the board and other critical stakeholders. Companies focused on the long term will likely experience challenging periods during which their performance lags behind that of their competitors or the market more broadly.
To get through these difficult times, the board and its CEO must have courage and patience, given the enormous external pressure to focus on the short term. Both the CEO and board must be pragmatic, maintaining an ongoing view of long-term goals, but able to deliver short-term successes that tie into those objectives. In addition, they must use their strong communication skills to develop stakeholder relationships that will help them to gain trust for their long-term plans. Throughout all of this, a strong partnership between the board and the executive team, with clear alignment on the long-term vision and goals of the company, will be essential.
For boards, there are four specific activities to undertake in order to properly support and enable a long-term CEO: Ensure CEO and board collaboration, create a sense of inclusion, establish purposeful compensation, and undertake strong external engagement.
Ensure CEO and Board Collaboration
Boards and CEOs speak often, but it’s incredibly important to have continuous and committed conversations on the toughest issues with a long-term CEO. While it remains the CEO’s job to create the strategy for the business, directors who strive to stay involved in the process, and to deeply understand the CEO’s vision and how it was formed, will be better prepared to support the executive as they work to bring that vision alive. Frequent interactions will also create a level of comfort between directors and the CEO that enable the board to constrictively challenge the executive on both their assumptions and their goals.
On the flip side, as a board member, having a strong understanding of what your CEO is trying to do, and how it will be done, allows you to interact with stakeholders and shareholders who may be pushing for short-term returns over long-term results. You will also be more convincing in the process. There is a notable difference when listening to someone discuss and defend a course of action they understand and agree with compared to one they don’t.
“There are pitfalls, as when boards aren’t strong enough to challenge management. But we have been able to be successful because I can say to shareholders, without fear of repercussion, that I have a long-term vision for the company.”
Lars Rebien Sørensen, CEO, Novo Nordisk7
Sørensen became CEO of Novo Nordisk in 2000. Since then, he has increased revenue from kr20.8 million to kr107.9 million, and net profit from kr3 million to kr49.4 million.
Create A Culture of Inclusion
Within the board itself, create an open and inclusive board culture with little to no sense of hierarchy. A board that values each member’s expertise and experiences, actively seeks different points of view, and fosters constructive communications, will be a board that can give a long-term CEO the guidance and support they need.
To assist with this, many boards have started undertaking long-term succession planning for the board itself. By assessing current strengths and capabilities, and identifying areas for improvement, the board can systematically identify potential future directors who can bring new insight, expertise, and opinions to the board. This long-term planning also reduces the burden of undertaking director-by-director searches every time a director leaves the board.
Similarly, the board needs to be open to transformational change, even for itself. Many boards still use short term planning horizons themselves, even as they wish their executives would have a long-term focus. As directors rotate off the board, new members with long-term focus and experience are valuable additions, and should be sought out.
Boards are increasingly focusing on the long-term: According to a recent Russell Reynolds Associates survey of corporate directors, the most effective boards are 38% more likely to use a 5+ year time horizon to evaluate opportunities and make decisions compared to least effective boards.8
Establish Purposeful Compensation
Put in place a thoughtful compensation plan for the CEO and senior leadership team that provides incentives for long-term thinking and action. It’s understandably hard for a leader to focus on delivering long-term performance when the board is intentionally or unintentionally incentivizing them to deliver in the short-term.
Undertake Strong External Engagement
Engaging with external stakeholders – including the investment community – will pose additional challenges for the board.
It’s not reasonable or prudent for the board to ignore short-term pressure from the market. Far from it – they should actively engage with those investors, and understand why the market may be making certain demands of the company. In some cases, the CEO may be purposefully at odds with the market, but at others times it may be less intentional. For directors, it’s important for the board to balance their support of the CEO – who has to exhibit a long-term leadership approach – with the pressure from certain shareholders to focus on short-term deliverables.
Directors can actively, and proactively, engage with the market to get ahead of investor demands. By articulating the differences and connections between short-term demands and long-term corporate efforts, the board can lay out milestones to external stakeholders that may assuage them that they will get a return on their investment – and their patience.
This engagement can’t simply be the company’s standard earnings calls or issued statements. Directors themselves should engage in high-level and consistent personal communications with critical investors, including both short-term activists and those who have expressed a willingness to wait for their payday. While the investor relations team can help with these efforts, they shouldn’t be left to go it alone. Active engagement by the board demonstrates that directors are taking their fiduciary responsibility seriously, and personally believe in the long-term effort championed by the CEO.
“Ultimately, what’s even more important is your track record and how you build your reputation. We don’t have problems with institutional investors and short-term pressure. They know the type of company they’re investing in. They know that we’re thinking about the long-term but also paying attention to the short term.”
Pablo Isla, CEO, Inditex9
Isla took over Inditex in 2005. Since then, he has grown net sales from €6.7 billion to €20.9 billion, and net profit from €803 million to €2.8 billion.
Putting the Data Into Action
Boards that wish to transition their company to a long-term orientation will be pleased to know that long-term CEOs have the specific psychometric traits identified in this study, and that it is possible to assess candidates not only during an external search for a new CEO, but also during internal succession planning efforts below the C-suite. By cultivating rising executives with these traits, and hiring outsiders who have a long-term orientation, companies can intentionally shift from “quarterly capitalism” to a long-term orientation.
Once in the role, the Board can take specific actions around collaboration and partnering with the executive team, playing an active role in investor relations, and working closely with the CEO on strategic planning, to ensure that the CEO, the corporation, and all stakeholders thrive over the long-term.
In October 2016, shortly after celebrating its 22nd birthday, Amazon announced a host of new products and services. Amazon Prime Reading will now allow anyone with an Amazon Prime account to read as much as they want, for free, from a large selection of books and magazine (including such popular publications as People, Sports Illustrated, Cosmopolitan, and BusinessWeek). At the same time, they can now print their photos online through Amazon Prints, at prices significantly below the two previously dominant competitors, Snapfish and Shutterfly. Amazon’s new artificial intelligence device for the household – Amazon Dot 2 – will start shipping in a few weeks. A new music streaming service is just around the corner. At a price of $4 per month for Amazon Echo customers, it will be 60 percent cheaper than Apple’s equivalent offering. And rumors are swirling that Amazon may soon be launching a new chain of small grocery stores, focusing on selling perishable items (diary, meat, produce, etc.).
In one month, Amazon introduced new businesses that were potentially disruptive to newsstands and publishers, online photo processing companies, home technology manufacturers, online music services, and your corner store.
It’s par for the course for Amazon, and exactly what Bezos wants – a feeling his fellow long-term CEOs understand all too well.
SHAWN COOPER leads the firm’s Canadian Financial Services Sector and is a member of the Global CEO/Board Services Practice. He is based in Toronto. SHAWN COOPER
IVANA CVJETKOVIC is a Knowledge Director in the Board & CEO Practice. She is based in London.
ANTHONY GOODMAN is a member of the firm’s Board Effectiveness Practice. He is based in Boston.
PIETER LIGTHART is a co-leader of the firm’s Global Supply Chain Practice. He is based in Amsterdam.
PJ NEAL manages the RRA Center for Leadership Insight. He is based in Boston.
JUSTUS O’BRIEN is co-leader of the firm’s Board & CEO Practice. He is based in Boston.
DEAN STAMOULIS leads the RRA Center for Leadership Insight. He is based in Atlanta.
Additionally, the authors wish to thank
(Leadership & Succession, Chicago), Jacob Martin
(Leadership & Succession, Atlanta), and Emily Meneer
(Board & CEO, Boston) for their assistance with this report.
“Letter to Shareholders,” Jeff Bezos, 1997, http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf
“What CEOs Really Worry About,” Harvard Business Review, November 2016, https://hbr.org/2016/11/the-best-performing-ceos-in-theworld#
“Capitalism for the Long-Term,” Harvard Business Review, March 2011, https://hbr.org/2011/03/capitalism-for-the-long-term
“2015 Long-Term Value Summit Report,” Focusing Capital on the Long-Term, March 2015, http://www.fcltglobal.org/docs/default-source/default-document-library/fclt_march-10-ltv-summit-discussion-report.pdf
“10 years ago, I said PepsiCo had to be about more than making money. Here’s what’s in store for the next 10,” LinkedIn, October 2016, https://www.linkedin.com/pulse/10-years-ago-i-said-pepsico-had-more-than-making-money-indra-nooyi
“Inside the Mind of the Chief Executive Officer,” Russell Reynolds Associates, 2016
“What CEOs Really Worry About,” Harvard Business Review, November 2016, https://hbr.org/2016/11/the-best-performing-ceos-in-theworld#roundtable
“Global Board Culture Survey: Understanding the Behaviors that Drive Board Effectiveness,” Russell Reynolds Associates, October 2016, http://www.russellreynolds.com/en/insights/thought-leadership/pages/global-board-culture-survey-understanding-the-behaviors-thatdrive-board-effectiveness.aspx
“What CEOs Really Worry About,” Harvard Business Review, November 2016, https://hbr.org/2016/11/the-best-performing-ceos-in-theworld#roundtable