CEOs work long hours, make high-stakes decisions such as initiating layoffs or plant closures, and face uncertainty in times of crisis. They also are closely monitored and criticized when their firms underperform.
Guenzel’s co-authors are Mark Borgschulte, assistant professor of economics at the University of Illinois, Urbana-Champaign; Canyao Liu, a doctoral student of finance at the Yale School of Management; and Ulrike Malmendier, a professor of finance and economics at the University of California, Berkeley.
The researchers estimated the long-term effects of work-related stress on the mortality and aging of 1,605 CEOs of large, publicly listed U.S. firms. For estimates on mortality, they studied the effects of state-level protections for firms from takeovers and industry crises. The median CEO in the study’s sample of 1,605 firms was born in 1925, became CEO at age 52, and served as CEO for nine years. Some 71% of the CEOs had passed away by the study’s cutoff date of October 1, 2017. The median CEO had died at age 83 and passed away in 2006.
“CEOs who serve under stricter governance die significantly earlier,” the researchers write. Every year of less stringent corporate governance reduced mortality rates by up to 5%, the authors estimated. “Our findings imply significant health costs of managerial stress, also relative to known health risks,” they note. While stricter corporate governance regimes are seen as desirable, they — along with financial distress — impose significant personal health costs to CEOs, the researchers add.
“The COVID situation underlined the importance of studying work-related stress,” said Guenzel. CEOs don’t necessarily face the most stress; others with similar stresses may include a doctor or a pilot or a fulfillment worker, he noted. The authors chose CEOs because of the availability of relevant data to study causal effects, he added.
The study has implications for how firms motivate employees. “When we talk about CEO incentives and more generally employee incentives, we think that incentives are good because they make people work harder, and that’s true,” said Guenzel. “As a shareholder, you might like that because that makes your firm more valuable. But from an overall perspective, and specifically from a welfare perspective, there are costs to incentivize. And those costs include the private health costs of your employees. If you make them work harder, they might have systematically worse health outcomes in the future. It’s something to be aware of as a firm designs incentives for its employees.”
Pictures Tell the Story
For the estimates on aging, the authors used neural-network based machine-learning (ML) techniques to assess visible signs of aging in pictures of CEOs, covering changes in the “apparent age” from the early 2000s through to 2018. The authors collected a sample of 3,086 pictures of the 2006 Fortune 500 CEOs from different points during their tenure to estimate differential apparent aging in response to industry-level exposure to the financial crisis. They used primarily Getty Images photographs that recorded the dates they were taken and thus avoided the problem of company websites using CEO photographs from earlier years, Guenzel clarified. (See an example from the paper here.)
The CEO pictures tellingly captured CEO stress levels before and after the Great Recession. Before the recession, the difference in apparent age between future distressed and non-distressed CEOs was small and stable. But after the onset of the recession, the apparent age difference increased markedly, initially to about half a year, and then to a full year, the study found.
“The ML techniques are a promising avenue for the assessment of work-induced strains,” the paper stated, adding that it may well be the first time they are used in economic literature. The software had been trained on more than 250,000 pictures and won the 2016 ChaLearn Looking At People competition in the apparent-age estimation track, which the paper stated is comparable to first-tier academic publications.
Anti-takeover Protections and Industry Distress
Since the mid-1980s, several U.S. states had enacted laws to prevent hostile takeovers of firms. Those laws reduced stress for CEOs and allowed them to “enjoy the quiet life,” the paper noted, citing prior research. For example, CEOs became less tough in wage negotiations, faced fewer plant closures and created fewer new plants, the paper stated.
The “most potent” of anti-takeover statutes were the so-called “business combination” (BC) laws that thwarted hostile takeovers by imposing three- to five-year moratoriums on large shareholders conducting certain transactions with the firm, the paper noted. A total of 33 states passed BC laws between 1985 and 1997. Other anti-takeover statutes included those governing controlling stakes, fair pricing of shares, duties of directors and “poison pills,” which allowed existing shareholders to buy additional shares at a discount, thereby diluting the ownership stakes of hostile raiders, the researchers noted.
In studying the effects of industry-wide “distress shocks,” the authors identified firms in their sample whose industry equity value eroded by more than 30% over two years. Some 29% of the CEOs are still classified as experiencing distress as a consequence of the Great Recession by that definition, the paper stated. The study covered 49 industries, including notably banking, manufacturing, and retail.
The major takeaway from the paper for firms is to be mindful of the stress outcomes in designing employee incentives, said Guenzel. “All of us can think of a time when we were very stressed out. I don’t think that was a time when we performed at our best. Stress not only has long-term effects, but it also affects your immediate productivity – it’s no longer that clear if you’re really performing well if you’re too stressed and burned out. Designing incentives where employees are happy with their work and not always stressed out might not only have long-run health benefits for them, but they might also affect firm value or value creation.”
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