By Lawrence A. Cunningham
As boards and shareholders rate CEO performance this proxy season, they should weigh evidence of the value of long-term thinking: Companies boasting the longest tenured CEOs also tend to attract the best shareholders — those with the longest holding periods and highest concentration levels. That’s yet another advantage to companies and managers who attract such “quality shareholders” (or QSs), up there with curbing activism , countering proxy advisor power , and offsetting short-term pressure .
In recent years, the average CEO tenure of large U.S. public companies has risen to nine years from seven (the average varies year-to-year and across statistical methods). Research by search firm Spencer Stuart concludes that many CEOs create greatest value during the “golden” years 11- to 15, when knowledge and experience may be optimal. Some experts suggest 10 years may be ideal for most: long enough to contribute a lot, but short enough to avoid complacency.
The longest-serving CEO currently is Warren Buffett of Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.46% /zigman2/quotes/200060694/composite BRK.B +0.42% , at the helm since 1970; runner-up is James H. Herbert II of First Republic Bank /zigman2/quotes/200683073/composite FRC +0.51% since 1985.
We identified CEOs with tenures of at least 10 years as of the beginning of 2020 from the companies in our database of 2,070 ranked by quality shareholder density . Of the 100 companies making the cut, one-fourth of the long-tenured CEOs ranked in the top decile for attracting QSs, one-half in the top quarter, and almost all (85) ranked in the top half. In other words, long-tenured CEOs are associated with high-quality shareholders. As a group, moreover, such companies tend to outperform.
At the top of the heap are a few CEOs with decades at the helm, and a shareholder base ranking in the top-quarter or top-fifth for quality: Leonard S. Schleifer of Regeneron Pharmaceuticals Inc. /zigman2/quotes/203149337/composite REGN -0.39% (since 1988); Daniel Paul Amos of Aflac /zigman2/quotes/208944541/composite AFL -0.12% (since 1990); and John Wren of Omnicom Group /zigman2/quotes/209996569/composite OMC +0.78% (since 1997).
The longevity/quality correlation is particularly robust for companies with a tradition of long CEO tenures — one long-serving CEO followed by one or more others. Leading examples: EcoLab /zigman2/quotes/202628210/composite ECL -0.03% has had seven CEOs in its 99-year history; Emerson Electric /zigman2/quotes/200181610/composite EMR +1.42% has had three CEOs over the past 66 years; and Amphenol /zigman2/quotes/207999687/composite APH +1.73% , whose current and prior CEO together served 25 years (Richard Norwitt and Martin Loeffler). All three of these companies also boast a high ratio of QSs to shareholders at the other end of the spectrum, according to data from EQX .
Some of the longest-serving CEOs of QS attractors have become household names, thanks to both their tenure and their visibility. Examples besides Buffett are Jamie Dimon (Morgan Stanley /zigman2/quotes/209104354/composite MS +1.00% ) and Larry Fink (BlackRock /zigman2/quotes/207946232/composite BLK +0.78% ). Others are heirs in dynastic businesses, such as Patrick Gallagher (Arthur J. Gallagher & Co. /zigman2/quotes/202575509/composite AJG +1.56% ), David Simon (Simon Property Group /zigman2/quotes/209746667/composite SPG +1.64% ), and James Tisch (Loews Corp. /zigman2/quotes/208734362/composite L +0.45% ).
Several other long-tenured CEOs of high-QS companies stepped down during the past year, making those companies worth watching as their successors take the helms. These include the former recordholder, Leslie Wexner, who retired as CEO of L Brands Inc. /zigman2/quotes/202062875/composite LB +2.05% after 57 years leading the retailer he founded, and a former runner up, Alan Miller, who retired as CEO of Universal Health Services /zigman2/quotes/208539347/composite UHS +0.45% , which he had led since 1978.
The list of new CEO retirees is so long, moreover, that the rate of turnover in the role may be increasing. Those companies include Amazon. com /zigman2/quotes/210331248/composite AMZN -0.45% (Jeff Bezos, soon to be succeeded after 27 years by Andy Jassey); Abbott Laboratories /zigman2/quotes/203724446/composite ABT +0.13% (Miles White succeeded after 20 years by Robert Ford); Dominion Energy /zigman2/quotes/206853976/composite D -0.04% (Thomas F. Farrell II succeeded after 15 years by Robert Blue); Nike /zigman2/quotes/203439053/composite NKE +3.24% (Mark Parker succeeded after 15 years by John Donahue); and Merck & Co. /zigman2/quotes/209956077/composite MRK +0.81% (Ken Frazier succeeded after 10 years by Robert Davis).
Long-tenured women CEOs likewise have a good track record at attracting QSs. Two former CEOs whose companies are particularly strong performers are Phebe Novakovic of General Dynamics /zigman2/quotes/208560027/composite GD +1.11% (8 years) and Marillyn Hewson of Lockheed Martin /zigman2/quotes/200691238/composite LMT +0.77% (7 years as executive chairman after 7 years as CEO). Two whose companies struggled more, but who consciously cultivated QSs in their shareholder letters , are Indra Nooyi (PepsiCo /zigman2/quotes/208744353/composite PEP +0.0034% for 12 years) and Virginia Rometty (IBM /zigman2/quotes/203856914/composite IBM -0.90% for 8 years).
CEOs come and go for many reasons — from retirement or better job opportunities to ouster due to subpar performance or a bad business model But it’s hard to stick around without sustained long-term performance — and a supportive shareholder base. What seems to unite this cohort of long tenures with high QS density is a shared appreciation for long-term value creation: the CEO has a long-term vision for success and QSs are prepared to see it through with the company. Those reviewing incumbent CEOs should ponder the correlation between QSs and CEO longevity. There may be a lot of value there.
Lawrence A. Cunningham is a professor at George Washington University, longtime shareholder of Berkshire Hathaway, and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. To get updates, including an invitation to his exclusive webinar during Berkshire Hathaway’s 2021 Annual Meeting, sign up here.