Fight or Flight? How CEO’s Decide Whether to Exit during a Business Downturn
Turnover impacts productivity at all levels—especially in the C-Suite. A recent study looks at the decisions made by CEOs to stay or go when their company hits hard times.
Business success is anything but guaranteed. While 50 percent of start-ups fail within the first five years, the business lifecycle of S&P 500 companies (Standard and Poor’s) is now about 15 years, which is down from 67 years in the 1920s.
Business turnover is common for small and large companies. These days, it often results in an acquisition or merger if enough value remains in the business. Turnover, whether of employees or a business, can be a disruptive drain on resources and momentum. When that turnover happens at the top, it impacts the direction and, potentially, the future of the whole organization.
Social capital may predict whether your CEO stays or goes
In a study published in the Strategic Management Journal, researchers from the University of Arizona looked at the decision-making process used by executives pondering whether to stay or go during a corporate crisis.
For tech and other firms, housecleaning in the C-Suite is a common first measure to appease a corporate board or activist investors when profits start to go south. From their perch, chief executives usually have a pretty good idea of the direction their company is headed.
Because leadership is the first stop in assigning blame for corporate failure, executives are faced with damage to their reputation if they stay, and also if they go.
In the University of Arizona study, researchers found an important component of the decision-making process for executives considering their direction is social capital, which is the concept that networks of connected people hold value. The idea of social capital rests on the increased capabilities of humans when they perform tasks while working together.
Not to be confused with social media, social capitol is the power of a neighborhood or business community to draw together for a common good. The more social capital you have, the more connected you are, and the stronger your foundation in the sector you are in—whether that is a business, a school district, or a group of people interested in the same outcome.
For a worker at any level, social capital is important. You hear about more jobs, obtain inside information, gain opportunities to be involved with important issues, and have the chance to offer aid through your own connections when you have social capital. Job hunters are famously told, “It is not what you know, but who you know.” While subject matter expertise is essential, it is your social capital that is likely to help you find your next good job opening.
For C-Suite executives, the same holds true. Social capital enables them to gain information, get advice, share their troubles, and hunt for new opportunities if a decision is made to leave a sinking ship.
Findings from the University of Arizona research on the importance of social capital to execs were a bit surprising. Consider these points:
- Executives with the most social capital—the broadest personal networks—were likely to remain with a company, even when the business takes a downward pitch. Social capital is supportive, and when tended with care over time, can offer a resilient platform for CEOs with troubled companies. Executives can draw expertise and counsel from their social capital, reach out to connections suggested by peers, and use that feedback to better the position of their company. A CEO with significant social capital has more support to stay the course, and also a vested interest in using their abilities to lead a turnaround in company fortunes.
- CEOs in the Goldilocks position, those with some social capital but not a lot, were the most likely to navigate an exit from the company when value dropped. These individuals have enough social support to locate another job opportunity before their reputation is damaged by a corporate downfall. A lateral move away from impending reputational damage suits those executives with enough social capital to support their transition—but not enough to bolster confidence in their ability to turn the situation around.
- Chief execs without a lot of social capital were more likely to stay with their company for the duration. Without much buffer to find new opportunities, CEOs with little social capital may not have the opportunity to make a voluntary exit from a failing company.
Regardless of a decision to stay the course, executives often have little job security, even if their actions do slow business decline. In or outside of the C-Suite, social capital offers support for workers challenged with business instability—and just may help open new doors when the time is right.