Author: Antoinette Schoar and Luo Zuo (both MIT Sloan School of Management)
Publisher: National Bureau of Economic Research Working Paper No. 17590
Date Published: November 2011
CEOs who enter the workforce during a recession tend to have a different career path and management style than those who start when the economy is humming, this paper finds. Those who begin in harder times, and thus can be seen as more recession-minded, reach the top more quickly, and are more likely to rise through the ranks at a single firm than to move across companies and industries.
But they tend to lead smaller firms and receive lower compensation than their peers who started during brighter economic times. The findings point to the uncomfortable reality that the careers of recession-minded CEOs are not as successful as CEOs who begin in boom times.
“The economic conditions at the beginning of a manager’s career...have lasting effects on the career path and the ultimate outcome as a CEO,” the authors write. “If their achievements are less visible to outsiders,” they added, referring to recession-minded CEOs, “they might receive fewer opportunities to switch jobs and firms. This in turn might give them less bargaining power within their existing firm.” (A 2010 study was similarly downbeat for employees in general, finding a long-term negative impact on the wages of college graduates who enter the workforce in a bad economy. See “When It Pays to Stay in School,” by Matt Palmquist, s+b, Autumn 2010.)
Starting a career in a recession also affects a CEO’s approach to management, the researchers say. Such CEOs tend to run things in a more conservative way, investing less in capital expenditures and in research and development, for example.
The researchers began their study with the CEOs in the ExecuComp database, which covers current and former firms in the S&P 1500, between the database’s introduction in 1992 and 2010. They added career history and biographical information on the CEOs from the Biography in Context database, Bloomberg, Forbes, and the companies’ proxy filings. From these sources, the authors compiled information on more than 5,700 CEOs, or about 85 percent of those in the ExecuComp database. In the first step of their analysis, the researchers sought to explore how economic conditions at the outset of a CEO’s career affected his or her trajectory, so they focused on the 2,058 CEOs who had a relatively full and continuous career profile in the data.
In the study sample, 21 percent of the CEOs began their career in a recession, as defined by the National Bureau of Economic Research. On average, the managers in the sample took 22 years to become CEO, reaching that level at age 47, having worked in two industries and been employed by three previous companies. They held an average of six positions before being named CEO, with roughly three-year tenures in each of the prior jobs.
One concern for the researchers was that well-informed future CEOs could realize the downside of starting a career during a recession and thus delay their entry into the labor market, meaning more “average” employees would apply for jobs during bad economic times. To control for this, the researchers assumed the start of a person’s career at their birth date plus 24 years, as this was the average age of those in the sample when they got their first job. To account for any long-running trends in the economy and the way CEO careers evolved, the researchers limited their comparisons of recessionary and boom-time CEOs to the same decade.
On average, recession-minded CEOs took about one and a half years less than their boom-time counterparts to reach the top positions, the authors calculated. They had less mobility across industries and companies, and had fewer jobs before being promoted to CEO, suggesting that they had more internal career tracks. “People who start in worse economic times might find it more difficult to communicate their quality to the outside market since the firm is not growing,” the authors reason. “However, managers who start in boom times will have positive results even if they did not personally contribute a lot to the success of the firm.”
Managers who start their careers during recessions also have different experiences at the beginning. They are less likely to start out as a consultant (which has been shown to correlate with eventually becoming a CEO), more likely to begin in a small private firm, and less likely to land a job at one of the top 10 firms for producing future CEOs.
The tough early road also has lasting effects on CEOs’ final destinations and compensation. On average, recession-minded CEOs end up in firms about 20 percent smaller than CEOs who started their careers when the economy was thriving. The researchers found no discernible differences in the profitability or value of the firms. But based on an analysis of stock options received and exercised, recession-minded CEOs received 17 percent lower compensation on average than their non-recession peers.
To study the impact that a recession might have on management style, the researchers didn’t need detailed data on individual career paths, so they expanded their sample to 4,152 CEOs. Only CEOs who had been in their jobs for at least three years were included, to ensure that they had had time to make a mark on their company.
For this sample, the researchers obtained information from the Compustat database to study firm performance during the time the CEO was in office. They also incorporated data on mergers and acquisitions from the SDC Platinum database and stock return information from the Center for Research in Security Prices.
Besides investing less in capital projects and R&D, CEOs who started in recessions employed significantly lower financial leverage compared with non-recession CEOs. Their companies also had lower cash holdings, “which is often seen as a sign of better financial management and less wasteful slack in the use of capital,” the authors write, which suggests “that they are able to run a tight ship and/or get financing from their customers rather than having to finance them.”
But firms led by recession-minded CEOs also paid higher effective tax rates, which the authors argue is probably because these CEOS are more worried about the costs of financial distress that comes with having more leverage or using other aggressive tax strategies.
Finally, recession-minded CEOs managed their companies’ operations more conservatively, with more diversity across business segments, probably to guard against risk to a specific industry. They also had lower general and administrative expenses while producing higher profit margins. The stock-return volatility of firms led by recession-minded CEOs was 3.2 percent less, and these CEOs also appeared to engage more in earnings management, suggesting that a “conservative ‘tone at the top’ may put more pressure on mid-level financial reporting managers to manage earnings to meet or beat earnings targets, or to avoid debt covenant violations,” the authors write.
Boards should take these findings into account when choosing CEOs, the authors advise. After extended periods of pronounced growth, many managers may have learned how to steer booming companies, but would they know how to turn around a distressed firm? Because the results indicate that recession-minded CEOs do not perform differently during down times or booms, the authors argue that managerial styles, once formed, are relatively fixed over time.
“These results suggest that the supply of talent into the CEO labor market could sometimes have severe constraints which in turn affect how firms are run,” the authors write. “Therefore, it can be very important to understand how executive labor markets function and how they interact with the boards’ task of selecting the best manager for a given vacancy.”
Future CEOs who begin their careers during a recession are likely to rise to the top faster than their peers who started during an economic boom time, but on average lead smaller firms and receive less compensation. They also adopt a more conservative management and operations style.