Investors and other stakeholders were understandably sad to see Alan Mulally step down as CEO at age 68 in 2014 after successfully steering at Ford Motor Co. through the 2008-2009 financial crisis, avoiding the fate of rival automakers General Motors and Chrysler. But for every Mulally whose experience and talent are held in high enough esteem to overshadow most concerns about ability to lead effectively into his seventies, there are other CEOs who remain at the helm of big companies far longer than they should.
A recent research paper by Adam Yore and Brandon Cline—assistant professors of finance at the University of Missouri and Mississippi State University, respectively—looks at whether or not mandatory retirement policies for CEOs as viewed as a best practice in corporate governance. In recent years, there has been plenty of attention paid to the need for regular renewal and age diversity on corporate boards, but Yore and Cline couldn’t find prior literature focusing on CEOs.
“Mandatory retirement policies are far more common for boards. We were finding that only 20 percent of firms will have a policy for the CEO, where over 40 percent will have them for board [members], and this is particularly for S&P 500 firms,” Yore says. Blue-chip companies like Procter & Gamble and Coca-Cola are far more likely to have these policies for board members or for CEOs. Typically, the retirement age named in those policies is 65 for a CEO and 65 and 72 for directors, although 70 is also common for the latter. Yore sees the question of forced retirement for board members as more difficult to apply to the data regarding investor valuations because with an average board size of nine members, it’s less likely that any one individual will exert as much influence over corporate policy as the CEO—the reason why he and Cline focused their inquiry on the age of CEOs.
Yore and Cline’s survey finds that roughly half the firms in the S&P 1500 Index have adopted policies mandating retirement based on age. Their research concludes that having such a policy in place is an effective form of corporate governance, because it’s designed to reduce the risk of underperformance by an older CEO. Looking at more than 2,100 firms, the research didn’t find consistent evidence that the intent of these policies is to limit entrenchment, but it did find fewer incidences of such policies at firms where older CEOs are seen as an advantage because of their depth of firm-specific experience.
“Mandatory retirement policies are far more common for boards. We were finding that only 20 percent of firms will have a policy for the CEO, where over 40 percent will have them for board [members], and this is particularly for S&P 500 firms.”
Adam Yore, Assistant Professor, University of Missouri
Intrigued by an apparent disconnect between Canadian and U.S. approaches to mandatory retirement—a law passed in Ontario 10 years ago banned MRPs while the U.S. Equal Employment Opportunity Commission explicitly allows for bona fide executives to be forced out—Yore says he wanted to better understand how age is believed to affect CEO performance. Not finding much research on this in the academic finance literature, he turned to neurophysiology. Not surprisingly, that research shows that “cognitive declines exist with age, but that those declines can be staved off by experience,” Yore says. That made him wonder whether investors would prefer to have a Warren Buffett or a Mark Zuckerberg running a company. “What’s the value of having somebody who’s very experienced in the C-suite but maybe a little old versus someone who’s young, exuberant but perhaps a little brash?’
Yore and Cline’s research shows that while a firm’s decision to set a mandatory retirement age may be well thought out, shareholders also value an older CEO’s experience. That’s reflected in how much shareholders say they’re willing to pay for a company. Although those valuations declined with the CEO’s age, they were offset by experience gains.
“Investors are far more concerned about what’s going on in the C-suite and how the company is governed, at least broadly over the last 10 to 15 years,” he says. “I think it would be fair to say that interest gets heightened any time there’s a crisis or when shareholders experience losses.”
In most CEOs’ career, performance tends to decline once they’re past a certain point in age or tenure, says Professor Rita Gunther McGrath at Columbia Business School. One thing MRPs do “is give you an orderly way of saying ‘We’re not going to let it get to that stage,’ and for those [where it has], it’s a graceful way to exit the stage.”
The disadvantage of MRPs is that they sometimes hasten the exit of talented leaders who may have several good years left leading the company to success. ‘Nobody would suggest that Berkshire Hathaway would be better off if Warren Buffett left,’ McGrath says. Among other CEOs she puts in that category are Mulally, who implemented a succession plan at Ford and decided to step down after eight years, and Ivan Seidenberg at Verizon.
However, she sees justifications for mandatory retirement not necessarily related to the CEO’s age. ‘You can make the argument when you don’t have a forced retirement age, you have this clogging up of the pipeline effect and that your young talent can’t move into those roles in a timely way.’
Another reason is that forcing change in senior management reduces the risk of group thinking and potentially creates room for more diverse perspectives in the C-suite. MRPs also make succession planning more predictable. ‘It’s much easier to do your succession planning and your personnel allocations when there’s a time frame on it. If there’s no forced retirement age and you’re trying to groom [the CEO’s] successor, there’s no guarantee they’re ever going to move into the top job. So you have a much higher risk of losing that person or that person getting impatient, or getting disillusioned or cynical when those senior leader changes [aren’t being made].”
Marc Goldstein, who heads ISS’ policy steering committee, says he suspects that shareholder proposals seeking age limits typically don’t target CEOs because “at most companies the CEOs don’t serve on into their 80s and 90s unless they’re controlled companies.”
The following excerpt is from “Silverback CEOs: Age, Experience, and Firm Value.”
Using a panel dataset of 12,610 firm-year observations of S&P 1500 firms, we find little empirical support for the CEO Entrenchment Hypothesis, as MRPs are not associated with proxies for CEO entrenchment. We do find that MRPs are positively related with CEO age and negatively associated with the amount of firm specific experience, suggesting that shareholders perceive the costs of retaining an aged CEO to be significant, but also value their experience. …
Comparing firms that enact these policies with those who do not for CEOs near retirement age, we find that the negative impact of CEO age only exists for those firms which do not have an MRP in place. We therefore conclude that MRPs represent an effective form of firm governance designed to mitigate the underperformance of older CEOs.
Source: Silverback CEOs: Age, Experience, and Firm Value
Outside the United States, recent retirement announcements by high-profile CEOs have cited disruptive market events such as depressed metals prices and strategic business transitions rather than age as the backdrop for their decisions. Still, planned exits at Rio Tinto and GlaxoSmithKline reflect the increased pressure on boards by shareholders for change at the top, particularly when profits have fallen.
Robert Hirth, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which created a framework for assessing the adequacy of firms’ internal controls, believes tenure limits for CEOs should be based on whether they’re meeting objectives and serving as good role models rather than age. However, having a retirement policy is probably better than not having one if only to avoid perceptions of arbitrariness, he says. Without a policy, “people wonder what’s the evaluation criteria and why is Sally still there and Johnny isn’t.” The absence of retirement policies also boosts the likelihood of legal risks regarding alleged discrimination, he adds.
While technology is often seen as a risk that’s larger for older CEOs, McGrath believes CEOs may be more vulnerable when it comes to accepting technology-enabled changes in work culture. “To millennials, work is a thing that you do, not a place where you go. Technology makes things that used to take a long time and were really hard to do easy and quick,” she says. “The downside of that is that [older CEOs] have assumptions about the way the world works, which may need to be revisited when you’ve got a world that’s 24/7, constantly connected, and everybody’s using their own devices to do things.’
Those cultural changes raise questions about what constitutes loyalty or how decisions are made regarding an employee who should be developed for promotion, McGrath explains.
While he’s not sure MRPs are coming under greater scrutiny, Goldstein believes the concept of succession planning overall is getting more attention, whether focused on the CEO or the board itself. “Shareholders are talking to companies about it and companies are being asked—not necessarily publicly, but certainly behind the scenes—to come up with policies.”
Boards need to be prepared for a senior executive’s health emergency, which isn’t limited to someone in his 70s or 80s, he says, citing United’s recently appointed CEO, who received a heart transplant in January. “And there have been enough cases where boards were not prepared [where] it’s become more of an issue for shareholders.”