The notion of a global executive labor market is widely held, with frequent headlines touting the appointment of top executives to lead companies in far-flung corners of the world. Yet, new findings from Bocconi University suggest that the impact of local managerial talent on company performance is often overlooked.
In fact, their research underscores that policies aimed at bolstering economic growth at the local level have the potential to enhance the pool of leadership skills available to firms, ultimately benefiting their bottom line.
Executive supply
The researchers assess data from INPS, who are Italy’s social security bureau to understand the state of the Italian private sector workforce between 2005 and 2015. They then pair this with data from the balance sheets of those companies.
“We first documented that both firms and executives disproportionately target their searches within the same industry and geographic area,” the researchers explain, “arguably due to mobility costs and industry-specific human capital.”
In a bid to shed light on the significance of local managerial talent, the authors investigated the impact of executive deaths on corporate performance.
Their findings demonstrate the crucial role that managerial skills play in the success of a firm. Specifically, the study revealed that Return On Assets (ROA) declines by an average of approximately 0.8 percentage points in the year of an executive’s death and in the following three years. Given that the average ROA is 4%, this represents a noteworthy impact, equating to a loss of €759,000 per firm each year, primarily due to decreased sales.
Thin markets
Notably, the study underscores the importance of a local supply of managerial talent, as the effect of executive deaths was more pronounced in “thin” managerial job markets, where the pool of executives with industry experience is limited. In these markets, ROA dropped by 1.8 percentage points, highlighting the vital role of a robust local talent pipeline in driving firm performance.
“Managers hired following the death of an executive in ‘thin’ local markets have lower education and experience levels than those hired in non-thin markets,” the researchers explain, “and they are also more likely to leave the firm over the next few years, consistent with the idea that the short supply of executives in the local labor market generates manager-firm pairings of lower quality.”
The impact of a dearth of local executive talent is not limited to unplanned exits, such as executive deaths. Even in cases where an executive’s departure is expected, as with retirement, firms still experience a negative impact, albeit a less severe one (-0.5 percentage points of ROA for two years).
Interestingly, the study did not find a similar effect on firm performance for anticipated or unanticipated departures of middle managers (“quadri”), suggesting that the impact of local talent shortages may be more significant at the executive level. This finding underscores the critical role that top-level leadership plays in driving corporate performance and the importance of cultivating a robust local pool of executive talent.
“These results can plausibly be extended to other types of shocks that require firms to quickly acquire new types of skills in the marketplace—for example an unexpected, large business opportunity in an unexplored market,” the authors conclude, “and they seem to be generalizable to job markets outside of Italy, since international comparisons show that the Italian labor market is not an outlier in terms of labor and worker flows.”
