TheCorporateCounsel.net

October 7, 2014

Study: CEO’s Age Impacts Company Risk Profile & Performance

I found this recent blog noteworthy because it discusses the influence of a CEO’s age on the company’s strategic direction – a previously inconclusive and undocumented association.

The article cites a new study (purchase required) of the S&P 1000, which demonstrates that older CEOs take fewer risks. Specifically, older CEOs invest less in research and development, make more diversifying acquisitions, manage companies with more diversified operations, and maintain lower operating leverage. Using the company’s stock price volatility as the indicator of risk, older CEOs are associated with less stock price volatility – less risk.  Further, company risk and the riskiness of corporate policies are shown to be lowest when both the CEO and the next most influential executive are older, and highest when both are younger.

As noted in the blog, the author also identified a correlation between the company’s risk profile and its CEO hiring practices – i.e., lower risk profile companies tended to hire older (and presumably more risk-averse) CEOs, as compared to higher risk profile companies that tended to hire younger CEOs.  That’s not to say that lower risk behavior is a better investment strategy. To the contrary – the study apparently determined that the risk-adjusted portfolios of companies managed by younger CEOs outperformed those managed by older CEOs.

The blogger’s bottom line: “Older CEO’s, who tend to make more conservative decisions, can be ideal stewards for firms seeking stability. But younger CEOs’ willingness to take on risky projects can pay off for shareholders in the long run.”

Study: Diverse Boards Are More Risk-Averse

Interestingly, this recent Workplace Diversity article also addresses the correlation between management and the company’s risk profile – but in a different way. It cites a soon-to-be-published study of more than 2,000 public companies that shows that companies with more diverse boards are less prone to taking risks (i.e., are more risk-averse), and more likely to pay dividends and have richer dividend policies.

Board diversity was defined broadly – to include gender, race, age, experience, tenure and expertise. Risk in this case was a function of each company’s capital expenditures, research and development expenses, acquisition spending, stock return volatility and accounting return volatility.  Companies with more diverse boards spent less on cap-ex, R&D and acquisitions; exhibited lower stock price volatility; and were more likely to pay dividends and to pay greater dividends than those with less diverse boards – leading to the authors’ conclusion that, “In general, risk-averse firms are more likely to avoid investment projects with uncertain outcomes and return cash to shareholders in the form of dividends.”

The authors of the study acknowledge that taking risks is part of doing business, but caution that excessive risk-taking can jeopardize a company’s survival.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Strategies to Address SEC’s AQM-Triggered Scrutiny of Your Financial Reporting
– Creating a Formal Framework for Accounting Judgments
– How Boards Need to Evolve Over Time
– ISS QuickScore Data Reveals Key Governance Trends
– Director Orientation & Onboarding Considerations

 

– by Randi Val Morrison