HR & Management
Corporate attitude can be shaped by CEO exposure to disaster as a child – and its consequences
3 min read
18 September 2015
Some bosses are less averse to risk than others. But why? According to a recent study by researchers at Singapore Management University, a CEO's exposure to natural disasters such as tornados and mud slides between the ages of five to 15 has an effect on their behaviour as executives.
Evidence has long indicated that a manager’s ability to assess and cope with risk has pervasive effects on corporate decision-making. For example, CEOs who hold MBA degrees tend to engage in more aggressive corporate practices, while firms run by CEOs with military backgrounds use less financial leverage, invest less, and are less likely to engage in “wasteful mergers”.
Firms run by CEOs who experienced financial distress in their previous employment issue less debt, save more cash, and invest less than other firms, and past reports have argued that CEOs who fly small aircraft are more inclined toward risky behaviour.
The Singapore Management University cross-referenced natural disasters that occurred during CEOs’ formative years – ages five to 15 – to determine their potential exposure to deaths from these events, and found marked contrasts.
CEOs who lived through catastrophes with high death tolls turned into cautious captains of industry. On the other hand, CEOs who experienced milder disasters became desensitised to the negative effects of risk.
It said: “These patterns manifest across various corporate policies including financial leverage, cash holdings, and acquisition activity. Ultimately, the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm riskiness and cost of capital.
“Across all the corporate policies and outcomes that we studied, our results are consistent with the hypothesis that experiencing natural disasters without extremely negative consequences desensitises a CEO to the negative consequences of risk. However, if a CEO experienced an extreme level of fatal disasters, he or she witnessed the downside potential of risky situations and appears to be more cautious in his or her approach to risk when at the helm of a firm.”
Furthermore, companies led by executives with moderate exposure to disasters had higher debt ratios and smaller cash holdings, and were more likely to acquire other companies – all measures of riskiness, said the study.
According to the research, Apple CEO Tim Cook, for example, witnessed “only” two deaths across 57 natural disaster events between those ages. Steve Jobs, born in San Francisco in 1955, witnessed 32 deaths across 39 natural disasters during the relevant early years of his life.
Cook was cited as having said: “I know of no one who has achieved something significant without also in their own lives experiencing their share of hardship, frustration, and regret… if you’re like me and you occasionally want to swing for the fences, you can’t count on a predictable life.”
Investors and corporate boards, meanwhile, can use the findings to help predict how executives will perform, said co-author Raghavendra Rau. The bigger point, he claimed, is that there are gradations in how life experiences affect executive behaviour.