So far, we have looked into the age, gender, marital status and nationality of the CEO and whether there was a relation with risky activities. This week, we will uncover another CEO characteristic, namely whether he/she is close to retirement or not.
Elie Matta and Paul W. Beamish performed a study about this topic, looking at international acquisitions that were made by almost 300 major American firms. The focus were short-term CEO decisions. Although only acquisitions were examined, the authors denote that the arguments of the study can be applied to risk-taking activities in general.
The authors observed that CEOs with shorter career horizons are less likely to engage in international acquisitions. CEOs close to retirement are reluctant to take risky decisions, since returns cannot be predicted properly. A possible explanation can be that they don't want to ruin their reputation during their final years as CEO. Since people tend to remember only the recent results and forget about the past performance, bad decisions in the final years of a CEO can ruin his/her successful career. Therefore, CEOs tend to get more risk-averse when they approach retirement.
Another explanation can be that CEOs want to maintain their wealth. CEOs are compensated in various ways during their career, including in the form of stock options or shares. When they retire, they have the opportunity to cash-out. Of course, this means that they want to maximize the value of their shares, thus maximizing their "retirement package". As a result, CEOs close to retirement will avoid investments that could bring the share price of the company down.
As a consequence, a gap between the CEO and the shareholders occurs. CEOs close to retirement focus on maintaining the stability in the short to medium term, while shareholders are more interested in the long term and future growth of the company.
The most important question however, is whether the risk-aversion of close-to-retirement CEOs are harmful to the company's growth. Of course, the long-term growth of a company is linked to risk-taking activities. Two topics are important here. On the one hand, the career horizon and thus, number of years before retirement are important. On the other hand, the compensation structure of the CEO has a major impact on the amount of risk he/she will take. When the close-to-retirement CEO is paid in a large amount with company stocks, this can be harmful to the long-term growth of the company, since he/she will be reluctant to take a lot of risks. However, when the close-to-retirement CEO is paid mostly in a fixed salary, this will be less of an issue.
Elie Matta and Paul W. Beamish performed a study about this topic, looking at international acquisitions that were made by almost 300 major American firms. The focus were short-term CEO decisions. Although only acquisitions were examined, the authors denote that the arguments of the study can be applied to risk-taking activities in general.
The authors observed that CEOs with shorter career horizons are less likely to engage in international acquisitions. CEOs close to retirement are reluctant to take risky decisions, since returns cannot be predicted properly. A possible explanation can be that they don't want to ruin their reputation during their final years as CEO. Since people tend to remember only the recent results and forget about the past performance, bad decisions in the final years of a CEO can ruin his/her successful career. Therefore, CEOs tend to get more risk-averse when they approach retirement.
Another explanation can be that CEOs want to maintain their wealth. CEOs are compensated in various ways during their career, including in the form of stock options or shares. When they retire, they have the opportunity to cash-out. Of course, this means that they want to maximize the value of their shares, thus maximizing their "retirement package". As a result, CEOs close to retirement will avoid investments that could bring the share price of the company down.
As a consequence, a gap between the CEO and the shareholders occurs. CEOs close to retirement focus on maintaining the stability in the short to medium term, while shareholders are more interested in the long term and future growth of the company.
The most important question however, is whether the risk-aversion of close-to-retirement CEOs are harmful to the company's growth. Of course, the long-term growth of a company is linked to risk-taking activities. Two topics are important here. On the one hand, the career horizon and thus, number of years before retirement are important. On the other hand, the compensation structure of the CEO has a major impact on the amount of risk he/she will take. When the close-to-retirement CEO is paid in a large amount with company stocks, this can be harmful to the long-term growth of the company, since he/she will be reluctant to take a lot of risks. However, when the close-to-retirement CEO is paid mostly in a fixed salary, this will be less of an issue.
