Are Mandatory Retirement Policies Good for Business?

More than a third of S&P 500 companies require mandatory retirement. Businesses implement mandatory retirement policies to get rid of older CEOs, refresh the C-Suite with new talent and ultimately encourage business performance. Consequently, the older a CEO, the more likely a company is to have one of these policies.

Does age actually correlate with performance? How effective are these policies overall? Research on mandatory retirement by Brandon Cline of Mississippi State and Adam Yore of the University of Missouri, discussed in the Harvard Business Review, attempts to answer these questions.

retirementCline and Yore’s research concludes that age does correlate with performance and mandatory retirement policies do benefit companies, save for a couple of exceptions. Specifically, their research findings are:

  • Older CEOs tend to underperform younger CEOs – older CEOs are less active
  • Firms with younger CEOs are more valuable
  • Every additional year in CEO age resulted in a .3% decrease in firm value for companies in the S&P 1500
  • The negative correlation between CEO age and firm performance disappeared in companies with mandatory retirement policies

A 2010 paper on age and invention supports Cline and Yore’s research, finding that business leaders develop their most effective ideas and breakthrough work in their 30s and 40s, and older CEOs tend to be less innovative.

But there are exceptions. Holding age constant, executive experience and tenure promote a company’s financial success. Accordingly, the longer a CEO has been with a company, the more likely the company not to have a mandatory retirement policy.

Warren Buffett supports the above assertion; he clearly opposes mandatory retirement: “At the Harvard Business School last year, a student asked me when I planned to retire and I replied, ‘About five to ten years after I die, ’” he states.

It is also unclear whether businesses should choose a younger CEO who has just joined a company or an older CEO who has spent a significant amount of time with the firm. In fact, younger CEOs only outperform older executives when holding tenure constant.

“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,” says Yore.

We may never see the end of the mandatory retirement debate; regardless, companies should heed the following advice: While businesses would be wise to reap the fruits of youth, executives should also respect that experience matters.

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