Why Many Successful CEOs Don’t Want to Retire – in Pharma Too?

“On Eve of Retirement, Jack Welch Decides to Stick Around GE a Bit,” reported the Wall Street Journal (WSJ) on October 23, 2000. Nevertheless, even the legendary Jack Welsh was made no exception to GE’s mandatory retirement policy for the CEO at 65. After holding the position of Chairman and CEO of GE for 20 years – with stellar performances, Welsh had to retire on September 07, 2001, as he attained that age.

This happened almost immediately after the US$ 45 billion merger with Honeywell. Welsh spearheaded this initiative, intending to create one of the world’s largest industrial companies, with manufacturing operations in plastics, chemicals and aerospace products, at that time. It’s a different matter altogether that later on, the report onThe Anatomy of the GE-Honeywell Disaster narrated a different reality on the consequences of this acquisition.

The key point to ponder – why many successful CEOs don’t want to easily retire, passing on the baton to a younger generation, unless directly or indirectly compelled by the investors or the regulators. In this article, I shall try to explore this point.

Many older CEOs not eager to head into retirement:

While discussing a similar point, an article titled: “For older CEOs, the issue is knowing when to bow out,” published in the USA Today on April 19, 2016, made some interesting observations. It said: “Just as older employees stay in jobs out of desire or necessity, some of those occupying the C-suite aren’t eager to head into retirement.”

According to a survey done by Korn Ferry among Fortune 500 CEOs, over the past decade:

  • The number of CEOs with age between 65 and 60 years, nearly doubled to 36.
  • Those with age between 70 and 74 increased from 9 to 13.

Korn Ferry also found in another survey that CEOs are the oldest and longest-tenured individuals compared with other prominent C-suite roles. Some of the oldest and famous global CEO names would include, Warren Buffett – 85 years of Berkshire Hathaway and Rupert Murdoch – also aged 85 years and is the Executive Chairman of News Corp. and Twenty-First Century Fox.

A couple of Indian examples of large Indian business conglomerates would include, A. M. Naik (born on June 09, 1942) who served as the Group Executive Chairman of L&T even at the age of 75 and the other – Y.V. Yogeshwar (born on February 04, 1947) was at the helm as the Executive Chairman and Chief Executive Officer at ITC Ltd till February 4, 2017, at the age of 70. More recently, on October 22, 2018, the Reserve Bank of India accorded its approval for reappointment of Mr. Aditya Puri as its MD & CEO of HDFC Bank Ltd. till October 26, 2020 – the date of his attaining age of 70 years.

What’s happening in the pharma industry?

The pharma industry too is no different. For example, Merck & Co’s distinguished top leader – Kenneth Frazier, who turns 65 on December 2019, will stay on as CEO beyond 2019. This was reported on September 26, 2018 stating that Merck has scrapped the policy requiring its CEO to retire at the age of 65. Curiously, this announcement is quite unlike what we witnessed in a similar case with GE where no exception made to the CEO retirement policy even for someone as globally famous as Jack Welsh.

Another recent example from the pharma industry, would possibly include one more celebrated pharma CEO – Abbott’s Miles White. He is currently at 63 and in his 20th year as the Chairman and Chief Executive of Abbott Laboratories. Just as Merck & Co, Abbott also announced that White doesn’t have any plans to leave his position as Chairman and CEO “anytime soon.” This happened, after the appointment of company’s President and Chief Operating Officer (COO), which is the first official No. 2 executive and COO Abbott happening after more than a decade, as reported on October 18, 2018.

A couple of similar examples from India that I gathered from the available data, may include: Pankaj Patel, 67 years (born 1951), the Executive Chairman of Cadila Healthcare and Basudeo Narain Singh,  reportedly 77 years of age, currently the Executive Chairman at Alkem Laboratories Ltd. Let me hasten to add, these names are absolutely illustrative, and not intended to be specific to individuals, in any way.

All publicly listed companies and not privately held:

The companies that I have quoted above, both global and local, are publicly listed companies. Thus, their ownership is dispersed among the general public in many shares of stock, which are freely traded on a stock exchange, or in over the counter markets. In view of this, the general questions come up:

  • Why the incumbent CEO can’t develop a successor from within or even outside the company during his/her tenure spanning over so many years?
  • Is there any other underlying reason for the same? If so, what it is?

Not considering the country-heads of MNCs in India:

Let me admit upfront with all due respect, for the purpose of this discussion, I am not considering the country-heads of pharma MNCs in India. This is mainly because, they don’t fall in the same category as the CEOs of Indian publicly listed pharma companies, having much broader global responsibility, commensurate authority and accountability.

At the most, the country heads of pharma MNCs may be compared with those managers who are in charge of only India, or South Asia operations of the domestic pharma players. Which is why, country heads of MNCs are commonly called ‘General Managers’ – internally, especially by their respective headquarters.

Is mandatory CEO retirement policy a good idea?

There are many studies on whether a mandatory CEO retirement policy is a good idea. I shall quote below one such important study to illustrate the point.

‘Should Older CEOs Be Forced to Retire?’ That’s the title of an article, published in the Harvard Business Review (HBR) on February 15, 2016. The author found that more than a third of S&P 500 firms have a mandatory retirement policy for their CEOs. The aim is to drive out executives who are past their prime. In the overall perspective, the HBR article is in sync with the idea.

Referring to a research paper recently published in the Journal of Empirical Finance, the above article highlighted some important findings of the researchers, as below:

  • Older CEOs were less “active,” as measured by a mix of hiring, firing, mergers, joint ventures, and more.
  • Mandatory retirement helped firms avoid the declining performance associated with older CEOs.
  • The negative correlation between CEO age and firm performance disappeared in companies with mandatory CEO retirement policies.
  • Mandatory retirement seemed to be helping firms with older CEOs to avoid the under-performance trap.
  • Length of CEOs’ executive experience plays a great role in a company’s financial success.
  • When there are two CEO candidates, both having requisite experience of equal number of years, the data suggests the younger one should be preferred.
  • Conversely, when there are two CEO candidates of the same age, bet on the one who’s been with the firm longer.

Should CEO retire at the peak of his/her golden era? 

This issue seems to be a contentious one. Be that as it may, about one third of S&P 500 firms have mandatory retirement policies for their CEOs. The goal is to systematically let go of leaders who are past their peak performance years.

An article published in The Washington Post on September 27, 2018 came with a headline: ‘Fewer companies are forcing CEOs to retire when they hit their golden years.’ It observed: ‘Sometimes a mandatory retirement age is lifted to give the current chief executive a little more time on the job, potentially clearing the way for a successor to prepare. For instance, in June 2017, manufacturing giant 3M said its board of directors was waiving the mandatory retirement age of 65 for its then-CEO, Inge Thulin, and then named a successor, chief operating officer Michael Roman, earlier this year.’

While retirement norms may be shifting, there’s seems to be a trend of indirect pressure on companies to add younger executives and directors to the board. This is primarily prompted by a growing demand for digital insights and technology experience in the CEO position – commented another article published in the Los Angeles Times on September 28, 2018. It also reported, many experts on corporate governance and executive succession believe that rescinding its policy requiring the CEO to retire at the age of 65, Merck & Co, ‘added to a long downward trend in the companies that have mandatory retirement ages for their top executives.’

Conclusion:

Regardless of whether a mandatory CEO retirement policy is a good idea or not, the aging high performing CEO’s desire to continue with the job for an indefinite period, has some downsides. It could thwart aspiration of similar high performing younger direct reports of the CEO. They include especially those who are ready to take charge and catapult the organization to a greater height of success, sooner.

A CEO’s desire to continue with the job, even after a generally accepted age of retirement, could also adversely impact a well-charted succession planning process for the top position. A time-bound succession plan is essential not only for a natural and smooth transition in the CEO position of an organization, but also to address any unforeseen emergency, such as a ‘drop dead like situation.’

Further, if there is no mandatory CEO retirement policy, or even rescinding it when there is one for a high a performing CEO, why there should be such policy for other C-suite, or many other important leadership positions of the same organization, with similar performance records?

One of the reasons behind a high performing aging CEO or an Executive Chairman not wanting to retire may also include the intent of the Board members to play safe. Nevertheless, it is a complicated and contentious issue. Regardless of whatever reasons lead to such a situation, the point to ponder is: What signal does it send to other high performing leaders? Does it convey, even the CEO is governed by similar policies as applied to other leaders of the corporation? Or, it smacks of a a discretionary corporate culture of governance? There is a need to ferret out a robust answer to this question – for a long-term sustainable success of any organization, including pharma.

By: Tapan J. Ray   

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

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