CEOs Face More Accountability When a Board Member Has Military Experience

Chief executives at poorly performing companies are more likely to be fired if at least one of the company’s board members has a military background.

The odds of dismissal for underperformance are even higher if multiple directors on the board have served in the military, according to a recently published study.

The researchers behind the study analyzed 865 publicly listed companies in the U.S. between 2010 and 2020, identifying companies with board members who had served in either the U.S. Army, Navy, Marine Corps, Air Force, National Guard or a foreign equivalent. A little more than a quarter of the companies in the sample had such a board member.

The researchers then measured company performance by looking at return on assets, a metric often used to determine how efficiently organizations are using their assets to generate profits.

Shape up or ship out

Across the entire sample, about 2.1% of CEOs were fired when their company was underperforming its peers—that is, its return on assets was two standard deviations from the industry mean. Having a military director on the board raised the dismissal probability to 2.9% compared with companies that had no directors with military experience, two directors increased it to 3.9% and three directors amplified it to 5.2%, the researchers found.

“When firm performance falls below the 20th percentile in an industry, the influence of military directors on CEO dismissal becomes noticeable,” says Stevo Pavicevic , an associate professor at Frankfurt School of Finance and Management in Germany and one of the study’s authors.

To better understand their findings, the researchers interviewed 20 corporate directors with military backgrounds. In the interviews, the researchers found that these board members often place a high premium on personal accountability. “It’s part of the discipline we grew up with in the military,” said one of the directors they interviewed.

The interviews suggest this focus on personal accountability translates into concrete action, such as being more inclined to conduct formal CEO evaluations and blame company-performance shortfalls on the CEO. “It seems that directors with military backgrounds have a different approach to accountability,” says Pavicevic.

Does tenure matter?

In another part of the paper, the researchers explored whether their initial findings would hold up if a CEO were entrenched in the company, meaning the executive had a long tenure, held a lot of stock or also served as board chairman.

They found that CEOs were still more likely to be dismissed for poor performance even when they had long tenures or held a lot of stock when a member of the board had a military background. However, in cases where the CEO was also chairman, the relationship disappeared. Those CEOs weren’t more likely to be dismissed if a member of the board had military experience.

“Being both the CEO and chairman of the board gives the executive a very powerful position and even with the presence of military directors on the board, dismissals won’t be that easy,” says Pavicevic.