The CEOs of the world’s biggest companies are keeping their jobs for less and less time.
On Tuesday, we highlighted a recent white paper from GMO Capital’s James Montier in which Montier takes aim at the idea that companies ought to strive, before all else, at maximizing shareholder returns.
Montier calls this the “world’s dumbest idea.”
In his paper, Montier addresses a number of side effects seen in corporate behaviour as a result of this paradigm shift towards shareholder returns over all else. Among these consequences is faster turnover both at the top of the world’s biggest companies.
Montier notes that since the 1970s, the average length of time a company stays in the S&P 500 has fallen from nearly 30 years to around 15 years. The tenure of CEOs has also fallen dramatically, from over a decade to less than four years.
And so given this trend, Montier writes, “[i]t is little wonder that CEOs may be incentivized to extract maximum rent in the minimum time possible given the shrinkage of their time horizons.”
Executive compensation over the last twenty years has more and more come to be comprised of stock and stock options rather than cash, which Montier argues gives executives motivation to goose share prices rather than invest in the business.
And the less time a CEO sticks around, the more aggressively they might take actions aimed as boosting share prices.