THE issue of chief executive officer (CEO) performance is undoubtedly a hot research topic in the management literature and has been investigated from various perspectives.
One of the contention issues in the country is the CEO's tenure where the central bank puts a cap of ten years. On this issue, there are two schools of thought one supporting the Bank of Tanzania (BoT) saying the 10-year limit has more benefits than disadvantages and others urging that CEOs need a lengthy period to implement their vision and turnaround corporates. Some studies show that over time, CEOs develop strong experience in how to lead the organisation and how to be successful in a given industry.
Experience may allow a more efficient and effective management approach, even when the environment is changing A study 'Exploring the Relationship Between CEO Characteristics and Performance' conducted by three Spanish scholars shows a strong correlation between CEO longer tenure and high financial performance.
"CEO's tenure in the firm appears to be an important factor," showed the study findings of Josep Garcia-Blandon, Josep M Argilés-Bosch and Diego Ravenda. The three are from IQS School of Management, Universitat Ramon Llull, Barcelona, Spain; Department of Accounting, Universitat de Barcelona, Barcelona, Spain; and Department of Accounting, Toulouse Business School, Barcelona, Spain respectively. "Specifically, long-tenured CEOs show stronger financial performance, though weaker environmental, social and governance (ESG) performance," the study showed.
Additionally, the Wall Street Journal also wrote recently an article discussing the correlation between companies with CEOs in a position for longer than 15 years and their stock prices within that same time frame.
The results showed that out of 28 companies with CEOs who had been in their position for longer than 15 years, 25 saw their total shareholder return exceed the S&P 500 index performance during their time.
During the CRDB's 29th Annual General Meeting last week former Prime Minister Fredrick Sumaye suggested that BoT reconsider the regulation limiting bank CEOs' tenure to a maximum of 10 years. Vertex International Securities Research and Analytics Manager Beatus Mlingi said the ex-PM proposal opens a critical dialogue about continuity vis-a-vis change in leadership.
"On one hand," Mr Mlingi said, "extending a CEO's tenure beyond 10 years could be beneficial, especially if the CEO has a clear, long-term vision and a proven track record of driving growth and stability," he told Business Standard yesterday. In the banking sector, where trust and strategic consistency are paramount, retaining a successful CEO could provide the necessary stability and confidence for sustained performance.
"This is particularly relevant for leading banks like CRDB and NMB, which together hold assets exceeding 25tri/-, a critical aspect for the country's economic stability. "The continuity in leadership can capitalise on a CEO's established relationships, deep institutional knowledge and strategic foresight," Mr Mlingi said.
On the other hand, he said, the regulation limiting CEOs' tenure to 10 years is designed to foster innovation and prevent stagnation.
"Change at the top can bring fresh perspectives and new strategies, crucial for adapting to evolving market conditions," he said.
He urged that the prolonged tenure of a misfit CEO could lead to complacency, inefficiency, and a potential decline in performance, harming the bank's long-term interests.
"A balanced approach would involve a robust succession plan ensuring that potential future leaders are groomed well in advance. "This not only provides a pool of capable leaders but also ensures a smooth transition, minimising disruption," Mr Mlingi said.
Additionally, successful CEOs could be transitioned into consulting or advisory roles, leveraging their experience without being at the helm, thus maintaining strategic continuity.
In cases where an exceptional CEO's tenure might need an extension, it should be considered a last resort, contingent upon rigorous evaluation and the absence of suitable successors. Mr Sumaye's advice, the Vertex Manager said, particularly for heavyweights like CRDB and NMB, could be invaluable in scenarios where stability and sustained vision are critical, ensuring the banks' continued growth and stability in the country's financial landscape.
Orbit Securities Financial Markets Specialist Ammi Julian said revisiting the BoT's CEO cap tenure "is a good idea" because bringing about a productive reform requires a long time.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
"There is a time when an institution is lucky to find a very good leader, but it loses him due to periods of leadership ceasing, thus leading the institution or company concerned to lose its vision," Mr Julian said: "The issue of quality and operational prowess and when the tenure will end, I think it may be under the shareholders/owners of the company or institution concerned," Mr Julian said.
However, the central bank maintained that the CEOs tenure cap matters since the country is not short of talented staff and the new ones will bring in new vigor and innovations.
In its banking and financial Institutions (Corporate Governance) regulations published in November 2021, the central bank among its objectives, set standards for corporate governance, processes and structures for the banking industry.
The regulations are meant to promote and maintain public confidence in banks and financial institutions and provide directors with guidance for the proper discharge of their duties.
