Skip to content

Age, experience and value to organizations: untangling the relationship for CEOs

by on February 18, 2016

The issue of assessing the value of a CEO to an organization is never going to be very straightforward – and there’s been a certain amount of speculation about this following the recent announcement that Sundar Pichai at Google has just become the highest paid CEO ever.

Harvard Business Review has also just published this article asking if older CEOs should be forced to retire. Apparently over a third of S&P 500 firms (large organizations listed on the US stock market index) have a mandatory retirement policy for their CEO.  Even though age discrimination is illegal in the US (as in the UK), there is an exemption that allows involuntary retirement for high-level executives.

Should organizations have such policies? The authors cite a recent paper in the Journal of Empirical Finance by Brandon Cline and Adam Yore (Silverback CEOs: Age, experience and firm value) in which the authors assess the merits of these policies in such companies.  The conclude that they ‘represent an effective form of firm governance designed to mitigate the underperformance of older CEO‘. But on what basis do they come to this conclusion?

They found that:

  • Firms with older CEOs tend to perform worse than those with younger ones but this was partly because younger CEOs are attracted to faster-growing companies. Older CEOs were also less “active” as measured by a mix of hiring, firing, mergers, joint ventures, etc.
  • But the correlation between performance and CEO age was mostly driven by the oldest CEOs in their sample, those aged over 68.  There was however no correlation between age and performance in organizations which had a mandatory retirement policy.
  • When they controlled for a years of tenure by the CEO, they found an interesting relationship. Basically, age is negatively correlated to performance where tenure is the same. So if you have two CEOs, each of whom has been with their company for 10 years, this suggests the younger one is predicted to lead to better organizational performance. But longer CEO tenure correlates positively with performance, holding age constant. So where there are two CEOs of the same age, the one who’s been with the firm longer is predicted to lead to better organizational performance.

Thanks to the HBR for their helpful analysis of the Cline & Yore paper.

Advertisements

From → In the news

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: