Long-tenured CEOs and firm performance: too much of a good thing? Evidence from New Zealand

Abstract

Purpose: This study aims to investigate the association between chief executive officer (CEO) tenure and firm performance. Extended CEO tenure offers the potential for organizational stability, sustained operational coherence and heightened insights into business intricacies. However, longer tenure concurrently fosters complacency and impedes innovation by engendering resistance to change and a deficiency in novel perspectives. The authors’ inquiry seeks to discern the prevailing influence between these contrasting perspectives.

Design/methodology/approach: This study uses unbalanced panel data for a unique hand-collected dataset from listed firms in New Zealand (2000–2020) – a country that adopts the principles-based corporate governance regime. The authors perform ordinary least squares, two-stage least squares and propensity score matching tests to examine the relationship between CEO tenure and firm performance.

Findings: The authors document a significant positive impact of CEO tenure on firm performance, implying the benefits of long tenure. However, this study further reveals a significant inverted U-shaped relationship between CEO tenure and firm performance, suggesting that such a positive impact can hold up to a certain threshold; after that, long CEO tenure can hinder firm performance. The finding is robust to alternative measures and endogeneity tests and offers important implications for corporate governance policies and practices.

Practical implications: The findings highlight the importance of balancing the benefits of long CEO tenure. Practically, firms should prioritize regular evaluation of CEO performance and tenure, emphasize succession planning and foster a culture of innovation to sustain organizational success in the long term.

Originality/value: This research offers valuable insights by examining the intricate relationship between CEO tenure and firm performance within the distinct setting of New Zealand. By uncovering both the benefits and drawbacks of long CEO tenure, this study contributes to a nuanced understanding of corporate governance dynamics.