Does it make sense to impose an age limit on leadership? Many people say yes.
In fact, more than a third of S&P 500 firms have mandatory retirement policies for their CEOs. The goal is to systematically let go of leaders who are past their peak performance years.
While such policies may yield companies some benefits, they are not without limitations, according to the Harvard Business Review. A study recently published in the Journal of Empirical Finance found that mandatory retirement helps organizations avoid the declining company performance associated with aging leaders. At the same time, the study identified evidence supporting the importance of executive experience to a company's financial success, according to HBR.
To analyze companies' performance, the researchers used Tobin's Q, which compares a firm's market valuation to the value of its assets, according to the report.
Companies with CEOs older than 65 tend to perform worse than those with younger executives, according to the study. This is partially due to the fact that younger CEOs are drawn to rapidly growing companies. After accounting for this factor, the researchers found that every additional year of a CEO's age was associated with a 0.3 percent decrease in firm value for public companies in the S&P 1500 between 1993 and 2005. The study also found older CEOs hired and fired less, and pursued fewer mergers and joint ventures, according to the report.
In companies that impose mandatory retirement, the negative correlation between CEO age and firm performance did not exist.
However, there is a catch. To isolate the relationship between CEO age and company performance, the researchers controlled for several other factors, such as industry, firm size. They also controlled for tenure with the company. This means if you have two CEOs who have each worked with the company for 15 years, data suggests the younger one will be a higher performer. At the same time, longer CEO tenure is positively correlated with performance — holding age constant — meaning if you are choosing between two CEOs who are the same age, the one who has been with the firm longer will likely be more successful.
Although this type of strategy might make sense from a research perspective, in practice, age and tenure are usually closely associated.
"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," one of the researchers said.