New study: CEOs having other job opportunities might be good for the company
The study, published in the Journal of Corporate Finance, was conducted by Gönul Çolak, professor of finance at Hanken School of Economics together with Timo Korkeamäki, professor and the dean of Aalto University School of Business.
“In many corporations, it is assumed that if the CEO is considering other jobs, it is automatically bad for the institution. But it is quite the opposite. If CEOs think that they can easily get another job, they are more likely to take risks, which can increase the value of the company”, says Gönul Çolak.
When CEOs presume that they cannot find another job, they tend to become risk averse and act conservatively.
“They might avoid starting risky but potentially profitable projects, because they are afraid to lose their jobs.”
The study builds on professor emeritus and Nobel Prize laureate Bengt Holmström´s article, which he wrote in 1982, while being a postdoc researcher at Hanken School of Economics.
Non-compete agreements can hurt the company
Data from the US shows that the likelihood of a CEO moving from one company to another, while keeping the same level job, is very low, around 3 percent.
“This is driven by many things. Typically, the CEOs tend to be the founder of the company, so they don't want to abandon their own company. Or the CEO likes the current job, becomes loyal to the firm, and simply does not like change. Age can also be a factor”, says Gönul Çolak.
Furthermore, CEO mobility can be restricted by non-compete agreements, i.e. contracts specifying that after the employment period is over, an employee cannot get a similar job with another employer who is the direct competitor of the current employer. This is done to protect company secrets.
“You have good intentions of protecting company secrets, but the agreements ultimately make it difficult for the CEO to have other job options.”
The same thing goes for remuneration packages, which consist of the total compensation offered to the CEO for his or her work.
“It might benefit the company if the remuneration packages are restrictive on other things, but when the packages are restrictive on mobility, it ultimately hurts the company.”
Gönul Çolak points out that the study is about long-term effects of shareholder loss and lack of innovativeness when it comes to CEO immobility. His advice for the Board of Directors is clear:
“Even though it may seem a bit counterintuitive, let your CEO know that he or she is free. It will allow the CEO to take more risks with productive projects. Ultimately this will enhance shareholder value.”
Text: Jessica Gustafsson