An Algorithm for a Successful 21st-Century CEO

Related Expertise: People Strategy, Value Creation Strategy, Leadership Development

An Algorithm for a Successful 21st-Century CEO

By Rich LesserGerry HansellKatharina Rick, and Roselinde Torres

When setting their direction, 21st-century CEOs make use of resources unimaginable to their pre-millennium counterparts: digital technologies, AI, vast data sets, democratized information flows, smart new algorithms, and more. They use algorithms as a tool for business analysis and apply algorithmic thinking when making strategic decisions. But is there perhaps some higher-level algorithm that would improve the odds of a successful tenure for today’s CEOs?

A recent BCG research project has been examining CEO tenure in all its aspects and working toward just such an algorithm. The project surveyed more than 450 CEOs in the US and Canada from the “starting classes” of 2009 through 2011. It involved the use of AI and included in-depth interviews with 14 prominent CEOs and board directors. By identifying the most successful CEOs and then isolating and analyzing their distinctive characteristics, we now know the most promising components of an algorithm for a successful 21st-century CEO tenure.

Measuring CEO Success

Success for CEOs is not just about creating impressive short-term results: anyone can lower the bar and then beat expectations. It’s more a matter of fully capturing value and sustaining it over the long term. That might seem obvious, yet CEOs fail—alarmingly often—to follow through. Many CEOs who survive the “sophomore slump” still end up struggling as seniors.1 1 See “ Surviving the Sophomore Slump: The Moves That Matter Most.” A Leadership Study from The Boston Consulting Group and Spencer Stuart (March 10, 2014), by Roselinde Torres, Judy Johnson, James Citrin, and Susan Hart. Notes: 1 See “ Surviving the Sophomore Slump: The Moves That Matter Most.” A Leadership Study from The Boston Consulting Group and Spencer Stuart (March 10, 2014), by Roselinde Torres, Judy Johnson, James Citrin, and Susan Hart.  For our purposes, the criteria for success fall under three broad headings, as shown in Exhibit 1.

The first two criteria, Great Company and Great Stock, are assessed by objective metrics—broadly, strengthening of the company’s competitive position and business economics (Great Company) and total shareholder return over time (Great Stock). CEOs who ranked in the top third on both criteria were characterized as having a “more successful” tenure. The third criterion of success, Great Legacy, is not measurable in the same way but was discussed extensively during interviews. (For further details of the study’s methodology, see the appendix, “An Outline of the Methodology.”) Under our tough grading system, the “more successful” status is hard to achieve: of the 252 CEO tenures that we were able to evaluate fully, just 18% rated as more successful; 47%, as a mixed success; and the remaining 35%, as generally less successful. 

These success rates apply regardless of the company’s performance at the time of original handover: for a new CEO, inheriting a thriving company is no golden wand, and inheriting an ailing company is no leaden shackle. After all, maintaining a high-level performance is just as difficult as boosting a low-level performance.

The Components of Success

Having shown that a new CEO’s success is negligibly related to the company’s performance at the time of succession, our study then homed in on some factors that definitely do correlate with a more successful tenure. They can be distilled into five broad components: a grounded and compelling strategic narrative, competitively advantaged moves, interactions with stakeholders, engagement of the organization, and a long-term positive imprint. (See Exhibit 2.) It is on these five features that the success algorithm is based. What really differentiates the more successful CEOs is their prowess at, and integration of, all five of these distinctive components. The following account is backed by AI analysis and enriched by the experiences and techniques cited by the CEOs and board directors interviewed during our research.

Defining and Communicating a Grounded Point of View

The more successful CEOs develop conviction about the best way to proceed. They confidently define the company’s potential and map a path toward fulfilling it. They pay close attention to external megatrends and internal signals and then devise a clear strategic narrative, condensed to a “critical few” imperatives. They develop this agenda from a fact base informed by customer pain points, competitive realities, and the economics of competing alternatives. They keep a sharp focus on the real value drivers of the business, including the capital allocation strategy, and they communicate the need for the rest of the organization to maintain that focus as well.

The way that CEOs communicate is very revealing in this regard. Less successful CEOs, in their communications, generally do convey some aspects of their strategic vision, but they tend to neglect elements that would increase the plausibility of their ambitions and would inspire confidence in their ability to execute. For example, they might tell a stirring story based on megatrends but fail to show any links to the value drivers of the business. Or they might devise a stylish mission statement but offer few plausible ideas for realizing it. The more successful CEOs tie together all aspects of a strategic narrative.

One of our study’s interesting findings, emerging from the natural language processing (NLP) analysis that we used, was that the more successful CEOs, particularly during their first few years in office, tended toward “biological thinking” rather than “mechanistic thinking”—suggesting a greater sensitivity to context changes, greater agility, and a greater readiness to make appropriate adjustments.2 2 See Think Biologically: Messy Management for a Complex World. A publication from the BCG Henderson Institute (July 18, 2017), by Martin Reeves, Simon Levin (Princeton University), and Daichi Ueda. Notes: 2 See Think Biologically: Messy Management for a Complex World. A publication from the BCG Henderson Institute (July 18, 2017), by Martin Reeves, Simon Levin (Princeton University), and Daichi Ueda.  

(See Exhibit 3 and the appendix for further details.)

Sequencing Execution Moves to Stretch, but Not Overwhelm, the Organization

The more successful CEOs make their strategic moves at a pace and in a sequence that challenge the organization and avert complacency. They do so by accurately evaluating both the external windows of opportunity and the organization’s internal capacity for change.

Our research showed how CEOs’ success is strongly linked to both the number and the type of moves that they make. The more successful CEOs made portfolio-reshaping moves—significant divestitures and acquisitions with disclosed terms—in a “sweet spot” of change: enough to stimulate but not so much as to overwhelm. To put it another way, they balanced urgency and restraint, evolving the portfolio rather than letting it sit as is or pursuing too much portfolio change at once (by making more than one deal per year, for instance) (See Exhibit 4.)

If we broaden the definition of “strategic moves” beyond portfolio shifts, to include capital allocation initiatives and various other significant or material changes affecting company performance, a similar pattern emerges. Exhibit 5 is based on a very broad set of strategic moves, including not just divestitures and acquisitions but also publicly announced transformation programs, major changes to financial policies, substantial restructuring initiatives, and resetting of the R&D-spending profile. Once again, the more successful CEOs seemed to find an advantageous midway point.

In regard to making strategic moves, CEOs and board directors emphasized a number of conducive factors: anticipating industry trends, getting the timing right, building up capabilities prior to making bolder bets, and linking moves to a broader capital allocation strategy.

One final note: the pattern of CEO moves is irregular. CEOs tend to make multiple moves in parallel, and some of these moves remain operative throughout the CEOs’ tenure while others are reversed or replaced as things change. And different moves take different lengths of time to embed. So a CEO tenure is best characterized as a series of overlapping cycles rather than as a series of discrete “acts”—opening act, middle act, and final act. With just one exception, all of the CEOs and board directors interviewed for our research study took the view that the discrete-acts model of a CEO tenure is no longer applicable in the 21st century.

Proactively Orchestrating the Stakeholder Ecosystem

As all CEOs know, a change agenda can be facilitated or impeded by the attitudes and actions of the various stakeholders: the board, the investors, the organization, the government and regulators, and the public at large. The more successful CEOs take pains to understand the expectations—often conflicting expectations—of all these groups, but they also reshape these expectations where appropriate, by challenging outdated assumptions and educating board directors on the new context (megatrends and moves that are part of the CEO’s grounded point of view).

The more successful CEOs tend to gain the confidence of all the stakeholder groups by working with them promptly and personally. These groups might include underrecognized but surprisingly influential sets of stakeholders, such as the company’s pension recipients or a unique customer segment. As far as possible, these relationships should be fully transparent, given that almost everything is out in the open in the 21st century. CEOs can no longer treat internal and external stakeholders differently in their communications, let alone play them off against each other.

The more successful CEOs seem able to accurately gauge the stakeholders’ level of alignment with the CEOs’ strategic vision and to react accordingly. And the data suggests that successful CEOs draw heavily on a particular set of productive engagement strategies—for example, anticipating and allaying the concerns of activist investors.

Mobilizing the Organization

The CEO can play a major role in engaging and motivating the workforce. In that way, the CEO’s agenda gets transmitted and amplified throughout the organization.

Most CEOs take great care in selecting and aligning their direct reports on the executive team and setting the cadence for them. What sets the more successful CEOs apart is that they tend to go much further than that and deliberately seek strong backing from the rest of the senior leadership team and the extended leadership teams. Rather than delegating executive team members to rally the troops, the more successful CEOs will typically connect directly with a variety of leaders in the organization, reinforcing their loyalty and activating their positive energy. The effect is to cascade the company’s purpose and values down the ranks and increase cooperation across silos, far more powerfully than CEO mandates or formal governance rules do.

Handing Over a Self-Revitalizing Company

The true measure of success for CEOs is not just what happens to the company while they are in the CEO role but also what happens after their departure—the way that the next generation of leaders maintains the company’s vitality and competitive advantage.3 3 See “ How Vital Companies Think, Act, and Thrive.” A publication from the BCG Henderson Institute (February 12, 2018), by Martin Reeves, Gerry Hansell, and Rodolphe Charme di Carlo. Notes: 3 See “ How Vital Companies Think, Act, and Thrive.” A publication from the BCG Henderson Institute (February 12, 2018), by Martin Reeves, Gerry Hansell, and Rodolphe Charme di Carlo.  

So when CEOs admit to being concerned about their legacy, it is not for the sake of gaining personal recognition and basking in the limelight. Their concern is that the improvements they made should be sustainable and should help their successors to succeed in turn. Ideally, the sense of purpose and values that they represented will persist. The talent that they cultivated will keep the momentum going (but will also readily adapt to changing circumstances and adjust the company’s direction if required). The organization will continue to attract further talent, enabling the company to regenerate itself indefinitely.

Finally, a CEO’s legacy can include a broader social imprint as well. Companies make an impact on society, whether they intend to or not, both locally and globally. The more successful CEOs seem to have a higher-than-average awareness of that impact, and—through directing company resources to create positive societal benefits—contribute to a better world.

Algorithms informing leadership choices are not a static cookbook of decision rules. Developing and applying algorithms involves constant prediction, monitoring of what’s working and not working, iterative learning, and adapting of priorities to match changing conditions. In our research study, the more successful CEOs were able to accurately read signals from the evolving context and to course-correct promptly and flexibly. By cultivating and constantly fine-tuning the algorithm’s five components, CEOs can boost their chances of creating a Great Company, while ensuring Great Stock along the way, and leaving a Great Legacy.