What CEOs’ Military Service Says About How They Run Their Companies

What makes some CEOs play by the rules while others push the boundaries? New research suggests an unexpected factor: whether they served in the military.

A 2007 IRS study found something fascinating in confidential tax data: small businesses in military communities are highly compliant in reporting their income to the IRS. What’s more, many of these upstanding businesses are run not by veterans themselves, but by their civilian family members. Just living among the shared values and social identity of military culture, it seems, rubs off on people’s willingness to follow the rules.

Intrigued, a team of researchers wondered: could this military community effect show up in the behavior of major company CEOs too? To find out, they collected data on CEOs of S&P 1500 firms from 1992 to 2011, noting who had military experience. The results are striking.

Saluting at Tax Time

The researchers found that companies led by CEOs with military backgrounds paid noticeably more in corporate income taxes — to the tune of $1–2 million per firm each year. A simple comparison of effective tax rates (the percent of profits actually paid in taxes) tells the story:

But maybe veteran CEOs just happen to lead companies with fewer tax dodging opportunities? To rule this out, the researchers used statistical techniques to control for a host of other factors, from CEO incentives to industry differences. The military effect held up: veteran CEOs really do seem less aggressive about minimizing taxes.

For instance, firms with military leaders operate in 12–17% fewer overseas tax havens, the notorious mailboxes that help companies shrink their tax bills. Veteran CEOs are also about 10–13% less likely to be “frequent flyers” when it comes to these havens.

Leaders Matter More Than Firms

Here’s what’s really remarkable: the researchers found that a CEO’s own management style has a bigger impact on the company’s tax aggressiveness than any inherent characteristics of the firm itself.

Using some econometric modeling, they broke down the reasons companies’ tax rates vary and found:

• ~50% is due to the particular CEO in charge at the time
• ~40% is unexplained differences between companies
• <12% is due to factors like the company’s industry or business model that stay constant over time

In other words, who is sitting in the boss’s chair seems to matter way more than what kind of company they are running when it comes to tax strategy.

More Than Following the Rules

So why the military CEO effect? The researchers see two likely explanations:

1. Military service instills an ethic of respect for authority, government and the public good that goes beyond just obeying the letter of the law. Veteran CEOs may see aggressively skirting taxes as disloyal.
2. People who choose the military tend to place a higher personal value on ethics to begin with. Avoiding taxes may feel less ethical to them.

When asked by Fortune Magazine why one in every four Lockheed Martin employees has served in the military, the CEO, Robert Stevens, remarked:

“We don’t hire veterans because I’m a veteran. We hire veterans because it’s good business. They have courage, integrity, honor and character. And they understand service and sacrifice in the interests of others. All that makes them good for our company and good for our business. It’s the right thing to do, and frankly, it’s the very least we can do.”

Gray Areas, Beware

Interestingly, the researchers found that veteran CEOs’ penchant for playing it straight shows up in other murky areas too. Their companies are less likely to:

• Be sued by disgruntled shareholders
• Make financial restatements
• Suspiciously backdate stock option grants

They also show fewer signs of massaging the numbers in their financial reports.

Implications for the Boardroom

The findings suggest corporate boards should think hard about what kind of leader fits their desired company culture:

Boards seeking squeaky clean executives may want to consider military experience as a plus. Hiring straight-laced leaders could substitute for strict monitoring in areas where misbehavior is hard to catch.

On the flip side, boards hungry for tax savings may need to dangle incentives to get veteran CEOs to pursue every tax loophole, given their personal reservations.

The Takeaway

At a time of shrinking CEO military service, this research offers an intriguing lens on how leaders’ values and backgrounds echo through the companies they run. It’s not just a veteran thing, either. Other CEO characteristics likely have ripple effects of their own.

One thing is clear: the tone at the top matters — not just for company culture, but for the bottom line. Boards are constantly hunting for the right leadership recipe. As this study shows, seemingly unrelated ingredients, like a stint in the military, just might have more bearing than they realize.

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About the authors:

Kelvin Law, PhD is an associate professor of accounting at Nanyang Business School, Nanyang Technological University in Singapore.

Lillian Mills, PhD is the dean of the McCombs School of Business at University of Texas at Austin.

The ungated version of the study, “Military Experience and Corporate Tax Avoidance,” is downloadable here, and the published version is here.