While studying the factors affecting corporate governance, Carola Frydman discovered an intriguing trend: corporate CEOs with military experience are steadily vanishing from the industry landscape. Among large, publicly held firms, the proportion of CEOs with military service in their background has decreased by an order of magnitude since 1980—from 59% to only 6.2%. Frydman, a visiting associate professor of finance at the Kellogg School (on leave from Boston University), along with Efraim Benmelech, an associate professor of finance at the Kellogg School, were already researching individual leadership personalities. The two decided to investigate the impact that CEOs with military backgrounds might have on the behavior of the firms they lead.

“For economists, it’s not necessarily an obvious view that individual characteristics matter in a corporate leader,” Frydman says. “For quite some time, economists thought it was it was all about the firm as a whole—that the most effective CEO was simply any person who would maximize value by implementing the firm’s policies. But now we are more interested in trying to separate out how much of these outcomes are due to the firm and how much can be attributed to individual leadership.”

“Our interpretation is that service in the military may prepare one to make tough decisions and show leadership in tough times.”

For Benmelech, who was born and raised in Israel—where military service is compulsory—the research question had additional personal appeal. “I served in the military myself,” he says, “so I was especially interested to see if this kind of experience could be shown to have a measurable impact in civil life.” Indeed, as described below, the researchers find that military CEOs tend to make ethical, conservative decisions—and to be particularly adept at leading firms under duress.

Searching for Soldiers

Benmelech and Frydman gathered biographical data on chief executives from the 800 largest US firms each year from 1980 and 1991 and from approximately 1500 publicly traded US firms from 1992 to 2006. The researchers tracked whether a CEO served in the military and, if so,in which branch, at what rank, and for how long. “It was a gigantic data-collection effort,” Benmelech says. “It took our team two years to put it all together.”

The authors’ analysis revealed three strong associations between CEOs with military experience and corporate outcomes. The first will ring true to any fan of Hollywood war movies. “In an industry that is going through a decline or some distress, we find that those firms that are run by CEOs with military experience perform better than other CEOs,” Benmelech says. “They perform better under pressure. Our interpretation is that service in the military may prepare one to make tough decisions and show leadership in tough times.”

Benmelech and Frydman also showed another association between military CEOs and conservative corporate behavior. If a chief executive has served time in the military, he or she is less likely to make bold investments in physical capital or research and development compared with CEOs with civilian backgrounds. At first this result seems counterintuitive, given that many psychological studies have shown “that military service leads to aggressiveness, overconfidence, and increased risk-taking,” as the authors write. Nevertheless, says Benmelech, “most modern militaries are very hierarchical organizations with sophisticated bureaucracies. And they’re incredibly good at training soldiers and commanders to make decisions without gambling. The reason, of course, is that you might be gambling with the lives of your soldiers. So while it’s true that soldiers are involved in riskier situations than civilians, there is a deep conservative streak in military decision-making.”

A Few Good Men and Women

But the authors’ third and “most intriguing result,” says Benmelech, is that CEOs with a military background are much less likely to engage in corporate fraud compared to their civilian-only peers—up to 70% less likely, in fact. So why aren’t all companies rushing to install military veterans in their upper corporate ranks? It is not just because there aren’t enough veterans to go around. While Frydman and Benmelech caution that their findings do not prove which mechanism is driving the phenomenon, they do offer two possible hypotheses.

One possibility, according to the authors, is that firms in a distressed market position, or seeking to avoid or recover from incidence of fraud, actively seek out chief executives with military experience to implement their policies. “That would be a matching phenomenon driving our results,” explains Frydman, “one that aligns more with the view that corporate policies of the firm as a whole are more influential than the values of the individual CEO.”

An alternative explanation takes the opposite approach, attributing the corporate outcomes of conservative investment, better performance under economic duress, and ethical financial behavior to the character and leadership values that military service instills. “It could be that military experience brings out these traits in people, and from then on it doesn’t matter what firm they go on to lead—they’re going to act in these ways,” Frydman says. Benmelech agrees, drawing on his own experience as a soldier. “People do grow up a lot in the military,” he says, “and the training has a real impact on developing leadership skills. I think the effect we observe is probably due to a combination of both possible explanations.”

Building Better Leaders

But while the authors stop short of proving the causality of their observations, they do suggest that they deserve further exploration from firms and business schools. “If we want to find a way to get people with these value systems to be business leaders, maybe we should take military experience into consideration when admitting people to MBA programs,” Benmelech says. “I’m not implying that we should have boot camps in business school. But we should think about what types of case studies or simulations we could do that would mimic tough situations.”

Frydman adds that the historical decline in corporate leaders with military experience might also change, given the past decade of wars that the US has waged in the Middle East and Afghanistan. But even if not, Benmelech says that taking inspiration from military training for business leadership makes sense. “You could say that the reason these military experiences are so impactful is because they may literally be written in blood—and that having students analyze tough case studies will never compare,” he says. “But you have to start somewhere, and we can learn from these discussions, even if the stakes are not as high as they would be on a battlefield.”