CEOs & Retirement Guidelines: A Brief Research Study

According to a recent article in the Harvard Business Review magazine (Feb. 2016 edition), “More than a third of S&P 500 firms have a mandatory retirement policy for their CEO. Their aim is to drive out executives who are past their prime.”

But are such policies a good idea?

In the HBR article, Should Older CEOs Be Forced to Retire?, Researchers Brandon Cline of Mississippi State and Adam Yore of the University of Missouri measured performance using Tobin’s Q, which compares a firm’s market valuation to the value of its assets.

Source: Harvard Business Review — Ideas and Advice for Leaders

Cline and Yore found that the correlation between performance and CEO age was mostly driven by the oldest CEOs in their sample, those over 68. The article says, “Mandatory retirement policies are typically aimed at executives near that age, so it’s plausible that such policies could help address this underperformance. (Although age discrimination is illegal in the U.S., an exemption permits involuntary retirement for high-level executives.)”

In the concluding paragraph, Yore says, “Our interpretation of the data is that while older and more experienced CEOs may benefit shareholders, the inexperienced [older] ones do not appear to add value.”

“Boards understand this trade-off. The researchers looked at which factors predicted whether a company had a mandatory retirement policy in place for its CEO; the older the CEO, the more likely the company was to have one. But when they looked at tenure, they found the opposite: the longer a CEO had been with the company, the less likely the firm was to have a mandatory retirement policy in place. Youth has its advantages, but directors know that experience matters too.”

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