Age diversity in C-suite can help with long-term innovation, study finds
Because younger executives have a longer career ahead of them, they can be patient about when investments will pay off.
The patience required for long-term innovation and success often runs headlong into the realities of short-term demands.
“There are quarterly goals for financial performance, and if the company cannot beat or at least meet them, the market will punish them a lot,” said Lei Gao, associate professor of finance at the George Mason University School of Business. ”The CEO might get fired or have their compensation package reduced.”
Recent research by Gao and others found that that companies with a larger-than-average age difference between the CEO and other C-suite executives are more innovative on the whole, meaning not only that they applied for and registered more patents but also that their patents received more citations.
Because younger executives have a longer career ahead of them, they can be patient about when investments will pay off. This makes them better able to counter CEOs’ orientation toward more immediate outcomes, such as financial performance and share price. This internal governance is about reducing costly conflicts of interest between shareholders and management. The board of directors is chiefly responsible for this, but the quality of its governance may suffer when directors are remote from the everyday activities of management.
“Independent directors, for example, don’t know the business very well,” Gao said. “They have less conflict of interest but are not always capable. Subordinate managers run the company day to day. They have enough stake in the future of the company. They have incentive and capability; they don’t need to be educated. They should serve as better internal monitors to make sure CEOs are doing the right thing.”
The innovation-enhancing effects of internal monitoring disappeared completely for the oldest quartile of firms in the sample, suggesting that mature organizations may be too set in their ways to benefit from C-suite age differences. Gao recommends that top management teams should be well-balanced in terms of aspiration and mindset, in addition to possessing complementary skills and professional experience.
“You need people with a longer horizon but also enough power that they make an impact. When the board designs the corporate governance structure, this should be a factor that they consider,” he said.