The Recession Speeds the Careers of CEOs

The light at the end of the crisis tunnel is yet to be seen. And this is a factor that in the short term affects young people's chances of finding their first job and what type of employment they will find. But there is another, lesser-known impact of recessions: that on the career paths of company managers.

In her research study ("Shaped by booms and busts: how the economy impacts CEO careers and management style") Antoinette Schoar (MIT Sloan School of Management) examines the careers of CEOs in some of the most important American companies between 1992 and 2010, distinguishing between those who entered the job market in recession years and those who did so during years of economic boom. The results are astonishing. The manager who entered the labor market during a recession attained the position of CEO faster than his/her peers, but is typically in charge of smaller firms and receives a lower compensation package. He/she has also made fewer career changes to climb to the top, both in terms of the companies and the areas in which he/she worked. One possible explanation is that entering the world of managerial careers in times of crisis reduces the bargaining power of managers in the early stages of their career and that this has a persistent effect over time.

But more surprising is her other result: if he/she started working in years of recession, this has an impact on his/her management style as a CEO: he/she tends to be more conservative, less inclined to risk-taking. This type of CEO tends to underinvest in fixed capital goods and R&D, seeks lower corporate leverage, pursues diversification strategies, and is more focused on cost reductions. Therefore, the conditions prevalent on the labor market when a young graduate starts to work seem to have a long-term effect not only on his/her career path, but also on the type of decisions he/she will take, when he/she finally becomes the head of a company after many years.

But why do labor market conditions in earlier stages of a career have such a persistent effect on the managerial behavior of future CEOs?

One possibility is that new recruits during recessions, as opposed to booms, are forced to acquire different skills and focus on different values. In other words, joining a company in times of crisis could leave an imprint in terms of cautiousness and efficient use of resources. But there could be also a selection effect. In times of crisis it could be that more cautious young managers get to be promoted, who are less likely to take potentially risky decisions. However, the empirical evidence seems to indicate that it is the first effect that proves decisive. If it were just a selection effect, it should be independent from the fact that the recession hits the beginning, rather than the middle of one's managerial career. But the data suggest that recessions in the middle of one's career (but before the manager becomes CEO) have no significant influence on management style.

These results are very interesting because they suggest that the type of CEO currently active in companies depends on how the economy has fared in the past. Prolonged booms could yield managers that are not equipped with the skills required to manage companies in times of recession and vice versa. In short, it seems that not only managers are confronted with the economic environment of their present, but also of their past. Most of all, in my opinion, studies such as this make it clear that the disciplinary barriers between management and economic studies are increasingly artificial and that dialogue is the only way forward for successful interdisciplinary research.