Why companies need more age diversity in their leadership ranks

Every year, Fortune publishes the Future 50, a ranking of the world’s largest public companies by their long-term growth prospects, co-developed with Boston Consulting Group (read more on the Future 50 and our methodology). In this series, we assess trends related to the future growth potential of businesses. Our previous article outlined why technology will remain the economy’s key growth engine going forward. 

Societies around the globe are aging, as birth rates decline and lifespans increase. This is expected to result in significant economic and societal challenges—driven by a shrinking labor force, increased health expenditures, and more pressure on social safety nets.

Businesses will feel these effects in several ways. For one, the demographic shift will induce a change in demand. In Japan, for example, the domestic diaper market has shifted from the traditional target group (parents of young children) to older adults, who use the products for incontinence control. As wealth becomes concentrated with the elderly, companies must actively pursue opportunities to develop new products and services tailored to older people. 

Moreover, there will be a significant change in the composition of the workforce—as younger age groups shrink (see graphic below), and as increasing health spans as well as changes to retirement regulations mean that older people work for longer. With a 60-year-old in the Western world now likely to live another 17 years of healthy life, it will be crucial for firms to improve their inclusion of more experienced workers. 

The age of company (and political) leaders is increasing rapidly

There is, however, one area where business is racing ahead of the demographic shift: Company leadership. The average hiring age of CEOs at Fortune 500 and S&P 500 companies has risen dramatically over the past two decades—from 46 years old to 55 years old. Several of the world’s largest companies are now helmed by executives that are significantly older than this, including Warren Buffett (age 93, Berkshire Hathaway); Seifi Ghasemi (79, Air Products & Chemicals); and Bob Iger (72, Disney). Rupert Murdoch (92, Fox Corp. and News Corp.) retired from the chairman role in September, but noted in his farewell memo to staff that he would continue to “be involved every day in the contest of ideas” at the company. 

The aging trend is also playing out in political leadership: The average age of a U.S. Senator has increased steadily since 1980—from 54 then to 63 now—and the likely candidates for next year’s U.S. Presidential election are 81 and 77 years old.

As a result of these developments, questions have arisen about how old is too old to lead, with some commenters worrying about a perceived frailty or potential cognitive decline of the oldest leaders. Others point out that research shows no relation between age and individual job performance and that aging may have positive effects on leadership capabilities by increasing experience, warmth, and empathy. The departure of many young founder-CEOs of tech companies—such as Aporva Mehta of Instacart, or Ben Silbermann of Pinterest—during the 2022 “tech crash” has shown that having a visionary at the company’s helm is not a panacea, as navigating companies through troubled times requires extensive experience and operational skills.

The debate, thus, should not focus on questioning the capabilities of more seasoned leaders or of less experienced talents. Rather, we believe it should focus on how businesses can balance perspectives across different time scales.

Age diversity in leadership is crucial for overcoming today’s and tomorrow’s problems

Businesses need to juggle the execution on their current business model and the exploration of options that could form the basis for future growth and advantage. Achieving the required ambidexterity is harder than ever: With rising interest rates, investors are increasingly demanding short-term payoffs rather than trusting long-term promises. At the same time, companies must contribute to solving humanity’s thorniest problems—such as climate change and biodiversity loss—which are unfolding over the long run. Doing so is not just a moral imperative; rather, finding solutions to these challenges is key to achieving a sustainable competitive advantage.

With the rapid aging of company leaders, there is a danger that the balance between these different time scales may be lost, at a cost to companies and to society. The Future 50 ranking provides some evidence of this: The average age of CEOs of the top 50 firms with the greatest long-term growth potential is markedly lower (52 years) than in the roughly 1,700 companies that make up the rest of the sample (58 years). Moreover, there is a statistically significant, negative relationship between corporate vitality (our measure of long-term growth potential) and CEO age, which continues to hold even after controlling for firm size and age (see graphic below). Indeed, the age of the top executive is the fourth-biggest factor (of a list of 19) in terms of its predictive power for vitality.

We believe this loss of balance can be addressed by striving for more age diversity in leadership ranks, i.e., a better inclusion of younger talents. Studies show, for example, that age-diverse leadership teams are better positioned to drive the adoption of sustainable business model innovations, and achieve superior CSR performance. More generally, bringing together diverse but complementary perspectives, skills, and networks in teams has been shown to lead to better decision-making, more productive collaboration, and improved overall performance.

So how can businesses achieve a better balance of experience and curiosity in their upper echelons? 

Towards intergenerational leadership

Achieving intergenerational leadership is not yet a well-codified area of business. Below, we outline four potential paths that companies should explore to harness the benefits of age diversity.

Consultation: One approach involves consulting younger leaders on strategic direction-setting. This may be accomplished by establishing a shadow board, in which younger talents team up with more experienced executives. This can help overcome generational divides and bring new perspectives to established leaders. Companies including Gucci, Mövenpick Hotels & Resorts, and TotalEnergies have established such boards and are reporting positive results. 

Another type of consultation is mentoring. For example, Chip Conley, who joined Airbnb in 2013 as head of global hospitality and strategy at age 52, quickly became one of the most trusted advisors to CEO Brian Chesky (then aged 31) and eventually mentored more than 100 people at the company, being affectionally called it’s “modern elder.” Conley points out that a crucial part of successful cross-generational mentorship is for it to be mutual—with wisdom being shared in both directions.

Co-leadership: A more formalized model would be to install top leadership with shared decision-making responsibilities – e.g., a co-CEO model, which research indicates can yield positive impact on shareholder value. A well-known example of co-leadership was put in place at Google in 2001, when Larry Page and Sergey Brin (both 28 at the time) convinced Eric Schmidt (then 48) to join up as CEO and chairman, providing “adult supervision” to the founders, who took on the roles of president of products and president of technology, respectively. 

Another example is that of the co-founders of Workday, Dave Duffield and Aneel Bhusri, who, at the time of their company’s IPO (in 2012) were 72 and 46 years old, respectively. The two applied the co-CEO model successfully—growing Workday’s valuation eight-fold between the IPO and Duffield’s retirement in April 2021.

Separation: Another route to strengthening the voice of the next generation is to install separate decision-making bodies. This may be done vertically, by implementing a bicameral governance setup (like in many governments), in which a chamber of less experienced talents could propose strategic moves for a separate chamber of more experienced executives to approve (or vice versa). 

An even further-reaching idea is to construct different “temporal business units” focused on developing capabilities or offerings on different time horizons. For example, in the Alphabet portfolio, Google is responsible for making breakthroughs in machine learning and AI development to enhance the firm’s core search product in the short run, while DeepMind’s main mission is to develop an artificial general intelligence in the longer term.

Substitution: Finally, and most boldly, paving the way for the next generation may also take the form of creating space for more junior leaders by imposing term limits or other retirement rules for leaders, or defining quotas for age diversity. More than half of S&P 1500 companies have put in place mandatory retirement policies for CEOs and directors based on age, while rules based on tenure remain rare. Crucially, these leadership decisions should not be made based on age alone but be paired with regular performance assessments and succession planning.

***

Companies are confronted with heightened pressure on both short-term execution and on finding solutions to long-term problems like climate change. The rapid aging of company leadership may lead to a loss of balance of short- vs. long-term perspectives at this critical juncture. To counteract this, firms should strive towards intergenerational leadership models to achieve an improved balance between experience and curiosity. 

Article Source

Leave a Comment