Route to the top: the demand for performance.

SHAREHOLDERS MAY BE THROWING GARLANDS AT YOU TODAY, BUT IF YOU DON'T PERFORM, DON'T BE SURPRISED TO DISCOVER A CASSIUS OR BRUTUS AMONG YOUR DIRECTORS - OR BARBARIANS AT YOUR GATE - ONLY TOO EAGER TO FILL YOUR SEAT...

A CEO's job has never been easy, but does it have to be this hard? The Fourth Annual Route to the Top study reveals pressures on CEOs from different directions. Performance demands coupled with other factors are creating CEOs at a younger age and removing them sooner.

In 1998, David Coulter, president of Bank of America, fell victim to a hedge fund loss that cost his bank hundreds of millions. He was 51. Dow Jones president and chief operating officer, Kenneth Burenga, took early retirement at age 54 after struggling unsuccessfully to turn around the company's Telerate unit. Walter Forbes, age 55, and former CEO of CUC, was forced out after fraud was discovered in Cendant, his merged company. There is a pronounced absence of patient capital investing in U.S. corporations.

Spencer Stuart has identified several trends that make the job of today's CEO more like "The Perils of Pauline" than the "Triumph of Succession." The principal pressure comes from a demand for performance and board control of succession. Independent directors have made a CEO's seat much less secure and open to external benchmarking - not just within the industry where a company competes, but across industries. This is partially why the U.S. has seen the rise of foreign-born CEOs who bring a record of experience and performance.

But other factors also weigh on a CEO's time in office. Successors are no longer willing to wait to have a chance to run the company. Increasingly, they are leaving and taking a top job elsewhere. A CEO not only has to worry about keeping a management team at top performance level, he or she has to worry about keeping them. Another factor is the effect of mergers and acquisitions. CEOs and designated heirs are finding themselves left out after a major business combination when the other side "wins" the internal battle for business control. Add to this "burnout" from the punishing pace CEOs keep today. It is not uncommon for a CEO to be a globetrotter who runs a company from 35,000 feet while circling the world. Just visiting plants and major customers of a typical global corporation is exhausting, even in the comfort of a private jet.

A final indignity that affects CEOs' tenures is growth demand that can outstrip a CEO's talent and ability to keep up. A CEO who is highly effective in running a $5 billion firm might flounder badly trying to grow the same company to $10 billion.

Spencer Stuart's study raises a serious question: What is the shelf life of a typical CEO? Some say CEOs can last a maximum of 10 years in the job without losing effectiveness. Only a few outstanding CEOs like Jack Welch of General Electric or Chuck Knight of Emerson Electric have lasted as long as 20 years. While politicians argue over term limits, U.S. business has imposed de facto term limits on CEOs.

This year's 1998 Route to the Top study was expanded to compare Fortune 200 CEOs to Fortune 200 CEOs in 1980. We also added an analysis of Fortune 501-600 companies to see if CEOs of firms in this size range were different from those in the Fortune 200.

Last year, we examined 1997 Fortune 100 CEOs compared to Fortune 100 CEOs of 1980. This study provided evidence that:

* CEOs are younger.

* Tenure with a company and in office has declined.

* A CEO needs general management experience.

* Educational background and degrees make little difference.

* General management and finance are the most common paths for the Route to the Top.

What Spencer Stuart learned this year is that last year's clues hold true for CEOs across the Fortune 500. Once again, Spencer Stuart analyzed age, tenure with company, tenure as CEO, educational background, career path history (positions and companies), military experience and international work experience. In the end, however, one key factor that makes a CEO is not defined by numbers. That is CEOs' ability to do the right things right for themselves and their organizations.

THE FIFTIES ARE FINER

The time to be a CEO is in one's 50s. The percentage of Fortune 100 CEOs in the age range of 60-plus has decreased by 18 percentage points since 1980. The average age of current Fortune 200 CEOs, 57, has gradually decreased since 1980 when CEOs on average were 59 years of age. In 1980, 48 percent of Fortune 200 CEOs were more than 60, while today that has decreased to 33 percent. This holds true across the board when Fortune 100 and Fortune 101200 CEOs are compared in age. Moreover, there is no significant difference between 1998 Fortune 200 CEOs and 1998 Fortune 501-600 CEOs in age ranges.

We believe this shows that it often takes an individual until his or her fifties to gain the breadth of experience needed to run a company, especially with the performance demands on today's CEO. During 25 years of work experience, a future CEO demonstrates increasing responsibility and success by tackling one job after another, whether or not with the same firm. When the CEO reaches the top job, he or she is a battle-tested veteran. However, this does not guarantee a CEO will be successful. The pressures of the top job are much greater than at any other corporate level.

TENURE GETTING SHORTER ALL THE TIME

Today's CEO's average tenure with a company has decreased since 1980. In 1980, the average tenure of Fortune 200 CEOs with a company was 24 years, or essentially one's entire career. The lowest average tenure with a company was in companies in the Fortune 501-600 range and came in at 17 years. Thirteen percent of current Fortune 100 CEOs have spent fewer than five years at their current company. This represents a 10 percentage point increase since 1980. The percentage of Fortune 200 CEOs who have spent fewer than five years at their companies has increased dramatically since 1980-14 percent in 1998 versus 5 percent in 1980. A striking 51 percent of CEOs in the Fortune 500-599 have been with their companies less than 15 years. This is a 16 percentage point increase over the Fortune 200. There is clearly less loyalty to a company today than in the past.

We believe that the reason for shorter tenure in companies is complex. For one, company careerists who have spent their entire lives with one firm no longer have an overwhelming advantage in reaching the top job. However, companies are reluctant to promote an individual to CEO who has not been with a company long enough to know the players. As a result, the door to the CEO's office has opened to executives who might have spent 10 years or so at another firm before coming to their present firm about 15 years ago. Third, because the average age of CEOs is younger, their tenure with a company necessarily declines as well. Finally, there is a greater proportion of CEOs brought in from the outside to lead companies in a time of rising global competition. Even CEOs promoted from within are being pressured to produce results quickly.

UP AND OUT

"There are three kinds of lies: Lies, damned lies, and statistics," said Disraeli. This is the case with CEO tenure. When examining averages, there has been no significant difference in CEO tenures since 1980. CEO tenure averages from seven to eight years. In terms of ranges, there has been a shift to CEO tenures of five years or less. A total of 54 percent of 1998 Fortune 200 CEOs have tenures of five years or less compared to 47 percent of 1980 Fortune 200 CEOs. Fortune 100 CEOs showed most of this shift. A total of 60 percent of CEOs in the 1998 Fortune 501-600 rankings have tenures of five years or less.

A similar drop has occurred in CEOs serving from six to 10 years in office. A total of 25 percent of 1998 Fortune 200 CEOs have served from six to 10 years versus 36 percent in 1980, and just 20 percent of 1998 Fortune 501-600 CEOs.

We believe this is happening because leadership is a pragmatic skill. CEOs rise to the top because they learn how to make things happen, and boards feel pressured by shareholder to make a company succeed. Thus, an Al Dunlap might be an appropriate CEO in one instance and a Michael Armstrong in another. The ability to lead a business successfully is infinitely variable and interesting. A CEO's job is not to debate what leadership is but to provide it and drive a company forward. When a CEO cannot do that, boards are increasingly willing to look for a replacement.

WHAT YOUR PARENTS TOLD YOU WAS ONLY PARTLY RIGHT

Most of today's CEOs were raised with a warning from their parents that they had to get a college degree to get ahead. As parents themselves, most have probably repeated that to their children, while ignoring Bill Gates and Michael Dell. It turns out this advice is only partly right. A total of 98 percent of Fortune 100 CEOs have college degrees versus 93 percent in the Fortune 101-200 and 89 percent in the Fortune 501-600. However, name schools mean little: Only 12 percent of Fortune 100 CEOs received an undergraduate degree from an Ivy League school. This finding discounts a long-held notion that certain universities produce future CEOs. Moreover, the kind of degree that one gets also means little. A total of 22 percent of Fortune 200 CEOs have undergraduate engineering degrees, the most common degree held, while 17 percent had liberal arts degrees and 9 percent undergraduate business administration degrees.

There is a pronounced trend among CEOs that the smaller the company, the more likely a CEO has an MBA. A total of 26 percent of Fortune 100 CEOs have MBAs, 33 percent of Fortune 101-200 CEOs and 40 percent of Fortune 501-600 CEOs. Just 8 percent of Fortune 200 CEOs went to Harvard Business School and 12 percent of Fortune 501-600 CEOs. CEOs attended a wide range of graduate business schools to earn their MBAs.

Postgraduate work has helped CEOs. A total of 37 percent of Fortune 100 CEOs, 34 percent of Fortune 101-200 CEOs, and 21 percent of Fortune 501-600 CEOs have at least one advanced degree other than an MBA. The most frequently held second degree is in law.

Why do specific schools seem to make so little difference? CEOs are picked for their management experience and success in progressively more challenging jobs. They don't learn their jobs in school, but through on-the-job training, with hands-on experience on how to handle people, how to anticipate market changes, and how to get things done in a corporate structure. However, it remains unclear why CEOs of smaller companies have more MBAs than those of larger firms because the ages of these CEOs is no different than those of Fortune 500 firms higher in the ranks. While this is an area that needs more study, a contributing factor may be that business schools train MBAs to aspire to the CEO role. Since only one will ascend at larger firms, the others may go on to smaller companies.

NO SIR, I DIDN'T SERVE

Nearly a quarter of Fortune 100 CEOs have military experience, but this number falls to 15 percent in the Fortune 501-600. While this might not seem significant, the military has long been regarded as a place where individuals can learn how to lead under difficult circumstances. Such leadership skill is thought to be transferable to civilian life. But, in fact, military service does not appear to be a contributing factor to the top job. One reason might be that Baby Boomers who are now occupying the CEO's office came of draft age during the Vietnam conflict when the military had a poor image, military managers were widely derided, and opportunities to avoid the draft, such as educational deferments, were available. Also, time spent in the military delayed opportunities to start a civilian career.

BIENVENUE?

The question of international experience is another instance where the statistics do not tell the full story of what is happening in the Route to the Top.

A total of 33 percent of Fortune 100 CEOs had international experience, but just 14 percent of Fortune 101-200 CEOs had such experience and a dismal 6 percent of Fortune 501-600 CEOs have worked overseas.

However, statistics fail to tell of an extraordinary event in U.S. companies - the rise of non-American CEOs and COOs. A cursory glance shows a quiet revolution in the ranks (see sidebar, this page).

Demand for international experience is prevalent among companies with long-established and extensive international operations, such as Ford Motor and Coca-Cola. This is happening because many large global companies in terms of assets, employees, and sales are no longer rooted in the U.S. They think and act globally. Hence, they can cultivate managers from many countries, some of whom rise to the top job. But these global firms are a minority. Most companies are still rooted in the U.S. However, even among U.S.-focused companies, performance demands are such that a foreign-born CEO with an outstanding record has a chance to travel the Route to the Top in a way that might not be possible in any other country except those from which they came. This is also why there is a sprinkling of CEOs with highly unusual backgrounds, such as Lawrence Weinbach, CEO of Unisys, who was the former head of Arthur Andersen, the global accounting firm, and Dick Cheney, CEO of Halliburton, who was a former Secretary of Defense.

HOW I GOT THE JOB

Some CEOs have stayed with their companies their entire careers, but they are the minority. A total of 40 percent of Fortune 100 CEOs have stayed at one company their entire career, but just 28 percent of Fortune 101-200 CEOs and 32 percent of Fortune 501-600 CEOs.

Some CEOs stayed in the same functional path, but they are even fewer than those who stayed with the same company. Just 20 percent of Fortune 100 CEOs stayed in one function on the way to the top, 19 percent of Fortune 101-200 CEOs and 31 percent of Fortune 500-599 CEOs. To be a CEO, you've got to know how to build, sell, and count.

A total of 68 percent of Fortune 200 CEOs and 62 percent of Fortune 501-600 CEOs started their careers in one of four functions - a management track, finance/accounting, engineering or marketing/sales. A total of 51 percent of Fortune 200 CEOs and 50 percent of Fortune 501-600 CEOs worked in finance, engineering, and marketing at some point. Finance and marketing are more common on resumes than engineering. The least number of CEOs in engineering occurred among Fortune 501-600 CEOs.

CEOs must understand both business strategy and the process of implementation. They must know where to go in their organizations in order to get action. As a result, it helps when a CEO has a view of an industry by working in more than one company and a holistic view from working in several disciplines within a company. The CEO knows what to expect and, to a degree, embodies a company's good points and weaknesses.

MORE OF THE SAME TO COME

If the CEO's job has gotten harder since 1980, we see it getting more difficult still. This is one result of the revolution in corporate governance that has taken place in the 13 years since Spencer Stuart began tracking corporate governance issues in its Spencer Stuart Board Index (SSBI), which for the past two years has tracked board trends and practices at S&P 500 companies. Independent directors are entrenched now and demanding that CEOs perform for shareholders. A total of 79 percent of SSBI companies' directors are outsiders now (78 percent of the S&P 500.) This is an increase in five percentage points since 1993. Moreover, for nearly a quarter of the S&P 500, the CEO is the sole inside director left.

Secondly, the boom period of growth that U.S. companies have enjoyed for the last 10 years has slowed and may not repeat itself. However, boards still expect CEOs to outperform the market and provide shareholders with handsome returns. This may be difficult to do in companies dependent on economies that are in severe recession and, perhaps, depression. A great CEO will find a way to develop and communicate a "Big Idea" that adjusts for these conditions without sacrificing a company's long-term growth. A great CEO will also find a way to motivate employees to find solutions for stalled growth. The CEO who cannot demonstrate such vision and flexibility will be out of a job sooner, rather than later.

SOURCES FOR THIS STUDY

Kathleen Nagel of Spencer Stuart completed this study. To compile the data, Nagel used Spencer Stuart's QuestNT database of more than 500,000 executives worldwide, published biographical data, company proxies, news articles, the companies themselves, and educational institutions the CEOs attended.

RELATED ARTICLE: UP, UP, AND AWAY

Most CEOs are primed for a lengthy tenure. In fact, many succumb to retirement - with great reluctance - only because corporate policy dictates they must. As John Whitney, executive in residence at Columbia Business School, puts it, "Many CEOs contemplate succession with the same enthusiasm that they contemplate death."

So when the CEO of a multibillion dollar company decides to abdicate his post long before his retirement date, there's usually a reason. Flagging earnings? Board pressure? A serious illness? A squeeze play of corporate politics?

In the case of Ted Martin, who announced his retirement as CEO of the $650 million Barnes Group in July of 1998, the answer - implausibly enough - was "none of the above." A dynamic CEO who had risen through increasingly visible leadership positions at Allied Co. and GE to become the head of the 150-year-old corporation, Martin drew on an admirable track record for turning around listless manufacturing operations to forge Barnes' three diverse business groups - Associated Spring, Bowman Distributing, and Barnes Aerospace - into a profitable, energetic team, strategically positioned in the aerospace and automotive sectors.

But rather than stay on to reap the fruits of his efforts, the 58-year-old CEO, who was at the peak of his career and earning power, chose to retire. What's more, Martin's decision to leave his CEO post after just three years - and with eight consecutive record-breaking quarters to his credit - came as a complete surprise to the Barnes' board of directors. Yet, for Martin, the decision was typical of his management strategy - the result of a straightforward calculation of optimum timing.

"I've accomplished everything I set out to do," Martin said following his announcement, adding that rather than being motivated by circumstance or business, the decision was about lifestyle. "I'm not interested in simply building a power base. And what's the point of accumulating wealth if you'll never taking the time to enjoy it?"

An attempt by the Barnes Group board - which was given some eight months notice - to convince Martin to stay on proved fruitless. "In my career I have fulfilled my dreams, so once I'd made up my mind to retire, it was time to get on with it," Martin told CE recently.

Sources affiliated with the Barnes Group board confirm that there was no dispute with Martin, and that the company had no succession plan - nor potential candidates - in place when the announcement was made. But that didn't phase Martin. "There are a number of qualified people out there," he shrugged.

Five months later, Barnes Group did just that, announcing the appointment of Edmund M. Carpenter to the president and CEO post. Carpenter, 56, was a senior managing director at the New York private investment firm of Clayton, Dubilier & Rice whose background also includes tenures as chairman and CEO of General Signal Corp. and president and chief operating officer of ITT Corp.

Meanwhile, Martin is also moving on - literally by moving to a warmer climate and figuratively with the purchase of a jet igniting the notion of renewing his pilot's license. He also plans to keep a hand in the corporate world, both by remaining a director on three boards (RJR Nabisco, Unisys, and Ingersoll-Rand) and accepting invitations to join others, although he resigned from the board of Barnes Group. Does he think other CEOs should leave early and smell the roses? That's up to each person, says Martin, but "I don't think a CEO should stay on the board after he's given up the executive role."

- Jennifer Pellet

Tom Neff is chairman, U.S., and Dayton Ogden is president of Spencer Stuart, a New York-based executive search firm with 48 offices in 23 countries.