When we think about where esteemed leaders earned their undergraduate educations, our minds naturally turn to the hallowed halls of Harvard and Yale. But there’s another training ground that may be equally valuable. It’s where Fred Smith, the founder and CEO of Federal Express, and Sam Walton, the founder of Wal-Mart, learned to lead — as did the current CEOs of Verizon and Johnson & Johnson.
They’re all veterans of the U.S. military.
In a landmark study, economists Efraim Benmelech and Carola Frydman analyzed the role of military experience in corporate leadership. They found that between 1980 and 2006, roughly 30% of all CEOs of large public U.S. firms had military experience. But over time, military backgrounds have begun to vanish from the CEO ranks. In 1980, 59% of CEOs had military experience, but this number plummeted to 8% by 2006. Starting with veterans born in the mid-1920s, the number of veterans in managerial positions has fallen steadily relative to the overall number of veterans.
It goes without saying that this is a disservice to veterans, who make immense sacrifices to serve our country, only to face stigma and employment discrimination when they return home. What is often overlooked, though, is that the decline of veterans in leadership roles is also a tremendous loss to companies and the economy. Benmelech and Frydman found that between 1994 and 2004, firms led by CEOs with military experience had significantly lower rates of fraud. “Military CEOs were about 60 percent less likely than nonmilitary leaders to preside over Enron-style cooking of the books,” writes Ray Fisman in his thoughtful coverage of the study, and “military CEOs were less likely to doctor earnings numbers when the pressure is greatest, during periods of low industry profitability. In these low profit years, the average rate of fraud rises to just over 1 percent for military CEOs, as compared to nearly 5 percent for civilian ones.”
Why might leaders with military experience be more honest? It’s probably a combination of selection and socialization. On the selection side, it’s possible that individuals with high integrity are more likely to be attracted to, chosen by, and retained in the military. On the socialization side, these principles are likely to be reinforced by the military’s strong emphasis on duty and honor.
In addition to preventing fraud, Benmelech and Frydman demonstrated that military experience predicted better leadership in tough times. During industry downturns, companies led by CEOs with military experience were valued more highly, perhaps because these CEOs had dealt with far more stressful situations in the past. Making decisions and strategizing under siege may well be excellent preparation for rallying the troops during a corporate crisis.
There was a caveat, though: companies led by CEOs with military experience did worse when their industries were thriving. This appears to be driven by the tendency for ex-military CEOs to be more conservative, investing less in R&D and capital.
Personally, I’d be willing to surrender a bit of innovation to prevent fraud. After all, it’s easier to teach innovation — or hire creative people — than it is to teach honesty. Armed with this knowledge, ex-military CEOs can increase their R&D expenditures when their industries are booming, while promoting stability when crisis hits. Speaking of stability, in a Korn/Ferry study, CEOs with military experience were more likely to stick it out for the long haul, averaging 7.2 years in the top seat — versus an average of 4.6 years for CEOs who had no military experience. And the CEOs who served in the military consistently outperformed the S&P 500 Index. Between 1995 and 2005, ex-military CEOs led their companies to average returns of 12.2%, compared with 9.4% for the S&P index.
It’s high time that companies placed a premium on hiring military veterans. Along with the leadership and integrity advantages, I’ve been floored by other qualities that are selected and developed through military experience, particularly discipline and commitment to service. For the past few years, I’ve asked my Wharton MBA students to name the single most impressive of their 800+ classmates. Although less than 10% of the class has military experience, in each year, the overwhelming winner has been a military veteran — a Navy SEAL, an Army helicopter pilot, an Air Force sergeant, and a Navy nuclear submarine engineer.
There’s reason to be cautiously optimistic about the future for military veterans. In 2010, Brian O’Keefe, a senior editor at Fortune, referenced a “large and growing group of companies that have begun to discover — or rediscover — the benefits of recruiting military talent.” In honor of Memorial Day, let’s make sure that list keeps growing. Military veterans serve their companies as well as their countries.