Term limits for CEOs?

The president of the United States has a term limit: two four-year terms in office. Why not the president of United States Steel Corp.? That's the gist of the question posed in a think-piece by a US legal scholar. Charles Whitehead isn't particularly advocating term limits, but rather asking why they seem never to be considered. After all, we've contemplated term limit for auditors and audit partners. In UK corporate governance since 2003 there has been an implicit term limit of nine years for independent non-executive directors. Why is the CEO any different? "The traditional answer," Whitehead says, "has been that CEOs are agents of the corporation, subject to control by the board, which holds primary responsibility for the firm's business and affairs." Senior managers are therefore shielded from outside interference. They can get on with executing long-term business strategies under the watchful eye of the board. The tenure of the CEO is therefore at the discretion of the board. Private ordering within the board, rather regulation or even shareholder democracy, determines when it's time to change course.

Whitehead argues, however, that recent regulation has called that deference into question. "New laws – in particular, Sarbanes-Oxley and Dodd-Frank – regulate director and officer conduct in response to the real possibility that long-term CEOs can control the board (rather than the other way around)," he writes. There's a new understanding of how shareholders, directors and officers interact.

Executive tenure: Putting a term limit on the CEO might actually lengthen CEO tenure. A variety of studies from a variety of directions suggest that CEOs' time in office has been getting shorter. In the wake of the Sarbanes-Oxley Act of 2002, Forbes magazine calculated that CEO average tenure was down to 3.5 years. A 2008 academic study using a broader dataset, reckoned that the average tenure was less than six years. Spencer Stuart, a firm of headhunters, said last year that CEOs spend 6.9 years in the top job and an average of 15.9 years of service with the company in all positions. Is Whitehead's suggestion an answer looking for a problem?

Source documents: The paper "Why Not a CEO Term Limit?", by Charles Whitehead of Cornell Law School will be published soon in the Boston University Law Review. The 2008 study "How Has CEO Turnover Changed?" by Steven Kaplan and Bernadette Minton, is a 50-page pdf file. The Spencer Stuart 2010 Board Index gives a wide overview of US boards.