How mid-tenure CEOs find a new gear

In this episode of the Inside the Strategy Room podcast, Kurt Strovink, who coleads of McKinsey’s global CEO services, and Carolyn Dewar, coleader of our CEO Excellence practice and coauthor of the best-selling book CEO Excellence, share strategies that the best leaders use to avoid complacency in the middle of their tenure, based on their recent article. This is an edited transcript of their conversation. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform.

Sean Brown: Carolyn, can you start off by explaining the research for this mid-tenure chapter of the CEO journey?

Carolyn Dewar: This is part of a series on the life cycle of the CEO.  A lot of it is founded in our CEO Excellence research, during which we sat down one on one with about 70 of the world’s highest-performing CEOs to understand what the role is, how they approach it, and what lessons they had learned. Time and time again, we came back to six responsibilities: to set the direction through the strategy and vision; align the organization around the culture, talent, and organizational design; mobilize through leaders so the CEO essentially plays the orchestra conductor role; engage with the board; connect with external stakeholders; and cultivate personal effectiveness.

Sean Brown: How do those responsibilities change in mid-tenure?

Kurt Strovink: A mid-tenured CEO may have had an initial strong run but is getting to the point where they have to consider renewing their initial agenda. The probability that a CEO can move their company from the middle of the pack to top-quartile performance is only about one in 12, so they have to constantly elevate their ambition and think about the next frontier. To do that, they need to create different ways of learning or a certain complacency can set in.

Sean Brown: CEO tenures are getting shorter, so when do you see the mid-tenure typically kicking in?

Kurt Strovink: Mid-tenure can start as early as two years into the role but it’s more typically three. One of the indicators is that you feel the first set of initiatives you launched has burned in and you are starting to think about where to build, refresh, or modify that trajectory. CEOs who are aware that the initial burst will eventually plateau and they will need to pursue the next S-curve do the best. Identifying the right time to launch that second S-curve is an important private conversation with the senior team and maybe with the board and other stakeholders.

Sean Brown: What priorities should CEOs entering the middle phase of the role focus on?

Kurt Strovink: We see four elements. The first is putting in place a learning agenda. At the beginning of your tenure, you’re doing listening tours, you’re expanding your own knowledge, you’re meeting some stakeholders for the first time. It’s often a period of great personal learning and a moment of institutional renewal for the company. By the second or third year, the learning rate typically declines unless you double down on it. As you become comfortable with the rhythms of the CEO job, you have the chance to broaden your external engagement, talking to different groups or learning more about your customers. The CEO of Lego, for example, spent time with focus groups and customers in mid-tenure and discovered that adults were a huge potential category for the company, so he built an adult franchise that now represents 30 percent of the business.

Similarly, spending more time with investors can be valuable. Some investors may be pushing for share buy-backs or other moves that generate short-term hits, but there will be longer-term investors who can help you think through value creation levers. Many CEOs in mid-tenure go deeper with a select number of investors who help them create the narrative for the next chapter. They don’t delegate those decisions to shareholders but are informed by their perspectives.

The third source of learning can be a network of fellow CEOs. During the COVID-19 pandemic, we wrote about the dramatic increase in CEOs spending time with other CEOs across industry lines because that crisis created common problems. Many of those networks have deepened since, and they can be a great source of insights for mapping your next S-curve. Ed Breen of DuPont, for example, told us that the network of CEOs he had built across different industries gave him provocative ideas for the next phase of his journey, ones he might not have gotten inside the company or his own industry.

Sean Brown: How do CEOs develop their learning agendas and whom do they typically rely on to organize them?

Carolyn Dewar: Both Satya Nadella and Bill Gates at Microsoft took the idea of a learning agenda very literally. They set aside a day a month as their CEO learning day and worked with their chiefs of staff to decide what topics they wanted to learn more about. Perhaps, to Kurt’s point, it’s developments in another industry or a new technology or trend. They served as organizational role models of the learning mindset, which is one of the big cultural shifts they wanted to drive.

Kurt Strovink: The CHRO will have a role in institutionalizing learning. How do we ensure that each leader, maybe in the top several layers of the company, has a learning agenda? To be clear, we don’t mean that the CEO should pop out into the external world and come back with a new idea every week. That torques the organization and makes it difficult to focus on the real mission. The learning we mean is the kind that gives birth to a bigger pivot, a bigger move, and is deeply considered.

A question I like to ask clients is, what analogies with other companies or leadership teams might help you? We often see an increase in what you might call go-and-sees in mid-tenure: visiting companies that may be outside your industry but are facing similar problems or doing something analogous to your business that you can learn from. It’s important for the organization to be porous to input from other firms and industries. The CEO can role-model this powerfully by asking questions like, “What do we know today that we didn’t know six months ago?” The key is to make sure you do not ossify and that the great period of learning at the early stages doesn’t tail off.

Sean Brown: Aside from learning, what else should CEOs do in mid-tenure?

Carolyn Dewar: The second element is taking an outsider’s perspective. Daniel Kahneman, the Nobel Prize-winning psychologist and economist, once conducted a study with a soup company to test price promotion. In half the stores, the team simply put the cans out with the price. In the other half, the sign said, “79 cents a can, limit 12 per customer.” What do you think happened? People bought more than twice as many cans in the stores that had a limit. The only difference between the two groups of stores was that in one group, customers thought, “Some people buy 12, so I’ll go down from that,” while in the other, they thought, “My current state is I’ll buy zero and I’ll work up to three.”

It’s an example of anchoring bias, a natural thought process our brains use to quickly jump to answers with incomplete information. This type of anchoring happens in business all the time. The average budget from year to year across business units or functions shifts by just a couple of percentage points a year. Very rarely do we take a fresh perspective and say, “If I was walking in cold, how would I set the budget?” Many excellent CEOs at mid-tenure take that outsider perspective, looking across business indicators—both leading and output, hard and soft—and say, “If I was to take a fresh view, what threats or opportunities would I see?”

Sometimes an activist investor does this for you. Private equity firms often re-examine assets every two to three years, saying, “If we were to do due diligence on this now, would we buy it? What would be the value creation thesis?” Excellent CEOs take a capital markets view. “What do investors and the markets expect of us? What growth have they built in? What frustrates them? If we look strategically, are we in the right businesses and geographies? Are there mergers and acquisitions we should be doing? Are our revenue and costs where they need to be? Do we have a healthy organization with the turnover, talent pools, and cultural indicators that we want? Is our reputation with the media, the public, and our stakeholder groups helping or hindering us?”

Kurt Strovink: Remember that the CEO role is sometimes about calibrating the extent of change needed at a given point. Are we moving fast and materially enough on our strategic priorities relative to our competitor set? We sometimes call this strategic distance. Fast enough means pace. Material enough means scope. Taking that full view of the organization is something CEOs can’t easily delegate, and shouldn’t.

Sean Brown: Are there barriers that prevent leaders from taking that external perspective?

Carolyn Dewar: The barriers are in the mindsets and the social fabric. It takes humility to open yourself up to this sort of analysis. It’s helpful to have external voices in the mix who help push your thinking. You need to create a safe environment where the leadership team is willing to admit, “I’m not sure that what we’re doing is the right thing for the next era. Maybe it got us here, but will it get us there?” It’s a mixture of having the facts so the discussion isn’t just based on anecdotes and the willingness to confront them.

Kurt Strovink: People sometimes get captured by their first phase. They put their hearts and souls into it. They may have developed proprietary strategies, language, and themes. The best CEOs find a way to keep the core messages consistent, but they adapt the strategies based on learning. They are constantly looking for signals of what’s working and what isn’t. Any good strategy will tack like a sailboat; it won’t always go in a straight line to its target. Strong CEOs in their mid-tenures have that mindset, and sometimes the leadership teams need to evolve to keep pace with evolving challenges. A pattern we’ve noticed is that in the first chapter, CEOs lead directly from the front. Then, the second phase is more about shaping the team that leads and creating the conditions under which they can step up. It isn’t a delegation committee, it’s still CEO-led, but with more leadership from the team.

Sean Brown: You mentioned earlier the need to chart the next S-curve in mid-tenure. Can you elaborate?

Kurt Strovink: An S-curve is the concept that, often early in a strategy’s development, numerous initiatives are launched that in time get you to a cruising speed where you’re getting a combinatorial compounding effect and a steep acceleration in performance. Then that levels off. We call this an S curve because of the shape. It’s important to realize when you begin to plateau—that can start as early as two years in—and you need to reset the strategy. When you combine the outsider’s mindset with your own learning, you get to a point where you can define that next S-curve.

For Hubert Joly at Best Buy, for example, the first chapter was a turnaround, which he led very much from the front. It was a significant departure from the company’s previous era and led to a step up in performance. But that ran its course and at a certain point he felt it was important to declare the transformation over. He then transitioned to a growth phase that built on that transformation, developing new capabilities around smart homes and other strategic directions. He had realized that the first chapter needed to sunset and the second chapter, or S-curve, could be built on the gains of the first one.

There are two major messages from this. The first is that you would be well advised as a CEO to assume that one S-curve will not cover your full tenure unless your tenure is unusually short. The second is that your own operating model will have to adjust so you can create more leaders around you to drive the second S-curve.

Sean Brown: How can CEOs spot when they’re hitting the crest of their first S-curve?

Kurt Strovink: One signal is that you’re seeing less performance yield from the initiatives you launched in the first chapter. On efficiency programs in particular, it’s difficult to maintain momentum longer than 24 months because exhaustion starts to set in. Another sign that you’re reaching a plateau is seeing people innovating in ways that differ from your original strategy, and you want to supercharge that. Other times, you see a dramatic change in the external environment or competitive space, and if you don’t get on the new trend quickly, you could lose some strategic distance.

Carolyn Dewar: Many of the best CEOs don’t wait for the markers. They’re always thinking about what can come next.

Sean Brown: You touched on the relationship between the team structure and moving to the next S-curve. How should CEOs evolve their teams?

Carolyn Dewar: After every strategic discussion about the next direction, the second question is, “Do we have the team to enable us to pull that off?” Sometimes, it requires simply adding a role. If digital will be critical to the next phase, you may want that voice represented on the senior leadership team. Sometimes, you have to take an honest view of the top team and ask yourself whether they are the right leaders. You see many high-growth companies, when they go public or are preparing for an IPO, look for talent beyond the founding team to take them forward. Is your CFO the one you need to navigate an IPO, which requires a specific skill set? That question can extend further down into the organization.

We often talk about a talent-to-value agenda. Do you know the 40 or 50 roles that are most important to get right given your strategy? Do you have “A” players in those roles? Are you disproportionately paying attention to them? These are strategic questions CEOs can’t outsource to HR or handle solely in a talent review process.

Sean Brown: The last priority you suggest for mid-tenure is future-proofing the organization. What does that involve?

Carolyn Dewar: Many CEOs face a crisis at some point. It may be internally created or an external shock. How you navigate those crises can make or break the career of an otherwise fantastic CEO and, more importantly, the fortunes of the company. Ken Frazier, the former CEO at Merck, told us about an exercise his team did every year to assess critical risks. Some call it a “pre-mortem”: You imagine a crisis. What could have caused it? What should we be doing now to make sure that doesn’t happen or that we’re prepared?

Reed Hastings at Netflix does the same thing. He says, “Imagine in ten years Netflix doesn’t exist. What happened?” It’s an aspect of scenario planning that teams use in strategy work, but it also helps a leadership team think ahead. Do you have alignment with your board on the company’s purpose, so if you have to make decisions on the fly, you have an anchor for those decisions? Do you have good relationships with your external stakeholders so you’re not going to them in a moment of crisis asking for kindness? During the banking crisis, for example, CEOs who had strong relationships with regulators and the market became the trusted parties that others looked to for assistance.

Another aspect of future-proofing is having a playbook or an operating model ready if a crisis comes. It’s easy in a crisis to get pulled down into the minutiae. The best CEOs have teams close to but separate from them who navigate the crisis. The CEOs do daily check-ins and make the important decisions but don’t become consumed by the details.

Finally, the CEO journey is a marathon, not a sprint. You’ve probably gotten through the first phase of your tenure through sheer force of will. Many times, leaders are exhausted at this point. Their teams are exhausted. It’s a good time to reflect on when you last got some coaching. Have you sought an outside-in perspective on how you’re doing as a leader? Has your team taken stock of how much energy is being used in managing potentially unhealthy dynamics? How much friction is in the system and could you grease that a little?