CEO Tenure and Stock Gains

The Wall Street Journal reports today on a study conducted for the paper by Spencer Stuart, the executive recruiting firm. Among firms in the S&P 500, 28 non-founder CEOs have served more than 15 years. 25 of these 28 firms have seen their stock outperform the S&P 500 index over this time period.

What jumps out at me from this study? First and foremost, we have to beware the tendency for people to confuse correlation with causation! Lengthy CEO tenure, in and of itself, may not be causing high stock performance. Some other factors, correlated with CEO tenure, may be causing high stock performance. Moreover, we could have reverse causality here. High stock performance may diminish the likelihood of turnover at the top. In short, that high stock performance may be driven by a number of factors. For instance, these firms may be in especially attractive industries. These CEOs may have certain qualities, or be operating under certain incentive systems, that drive performance. Tenure is simply a result, then, of the fact that successful CEOs tend to retain their jobs. The lengthy experience, by itself, may not be causing the high performance.

The Wall Street Journal acknowledges this point about correlation vs. causation, but I don't think it gets enough attention in the article. Moreover, as others are reporting on it, they are drawing quick conclusions about causation. I would caution strongly against jumping to those types of conclusions.