How CEO Characteristics Affect R&D Spending

What key factors influence a company's spending on research and development? Studies conducted during the past 15 years have focused largely on the nature of particular industries, corporate strategy and the level of ownership by institutional shareholders. However, in “CEO Characteristics and Firm R&D Spending,” a paper published in the June 2002 issue of Management Science, Vincent L. Barker III, an associate professor at the University of Kansas School of Business, and George C. Mueller, adjunct faculty member at the University of Wisconsin-Milwaukee's School of Business Administration, identify another critical contributor. CEO backgrounds — in particular, their academic specialization and areas of management experience — appear to more strongly influence R&D spending than has previously been believed.

“CEO characteristics do predict a significant proportion — between 11% and 14% — of the variance in relative R&D spending among the companies we sampled, after controlling for time and ownership attributes,” Barker and Mueller report. In addition, they point out that various CEO characteristics seem to have an equal or greater association with R&D spending than do other purported factors such as diversification strategy.

Barker and Mueller set out to investigate how a CEO's length of tenure, age, level of stock ownership, professional experience and/or level or type of education correlate to R&D expenditures. They used operations-research models to analyze data drawn from the 1989 and 1990 Business Week 1,000 lists and the Business Week R&D Scoreboard for the corresponding year. For each of the 172 companies that made R&D expenditures, the authors calculated the total R&D dollars spent per employee relative to its industry average, thus enabling them to correct for differences in R&D spending across industries. Data related to CEO professional experience was derived from special issues of Business Week about senior executives for the year of sampling. The authors coded CEO experience into categories (finance/accounting, legal, productions/operations, administration, marketing/sales, and engineering/R&D). In doing their analysis, they controlled for the influence of such factors as company ownership, company size, past performance and diversification strategies.

According to the authors, the CEO characteristics most relevant to R&D spending are type of education and professional experience. CEOs with graduate degrees in science and engineering, the authors note, are more likely to spend money on R&D than those with legal degrees, for instance.