Old CEOs Kill Shareholder Value

Daniel Drew, 1/14/2015

"Young people are just smarter." - Mark Zuckerberg, at age 22.

What makes a great CEO? Is it the vision, ambition, and risk-taking of the younger generation? Or is it the wisdom, strategy, and risk management of the veterans? It's a little of both actually.

The CEO path goes like this:

1. Inspire loyalty, and then betray those who have given it to you for personal gain.

2. Spend so much that your picture shows up on Google when someone types in "conspicuous consumption."

3. Go all in. Bet everything on one idea. Call it "The Strategic Vision" in the PowerPoint presentation to the board. If it succeeds, you will be a veteran. If it fails, you can write a book about it and return to the company as a consultant or even as a board member.

4. If your plan worked, maybe it's time to realize that you had no idea what you were doing. The universe handed you Aces. Reduce risk-taking. Become an old conservative CEO who destroys shareholder value while talking about "legacy preservation." The important thing is to destroy the value slowly enough so no one realizes you're driving the business into the ground. Kind of like how Coca-Cola does it.

5. Retire. Receive your severance package. Write a book about how hard work, perseverance, and innovative management made you the self-made man you are today.

Now we have research that shows stockholders are most rewarded if they stay close to the CEOs when they are in their arrogant primes. I can't help but wonder if there is a survivorship bias issue in these results, but I can't argue against this data. Matthew Serfling, doctoral candidate at Eller College of Management, has crunched the numbers for us, and the young guns have a clear edge:

"I find that a trading strategy that goes long in a portfolio of stocks consisting of firms managed by younger CEOs and short in a portfolio of stocks comprised of firms led by older CEOs would generate positive risk-adjusted returns."

According to Serfling's numbers, an investor gains 43.8 basis points of alpha per month with this strategy. He says older CEOs invest less in research and development, make more diversifying acquisitions, and maintain lower operating leverage. To summarize, they don't care about shooting the lights out because they want to make sure the company has enough cash on hand to pay them their severance package.

If you want confirmation of Serfling's conclusions, look no further. Randy Adams, a verified old person, wanted to be a tech boss in Silicon Valley. He spammed out his resume like a desperate 99 percenter only to be rejected by the labor-law-violating punks in hooded sweatshirts and blue jeans. Not used to this kind of failure, Adams shaved off his gray hair and wore Converse shoes. He got the job.