The value of hardship

My Financial Times column 10/18/10

These are rotten times to be graduating from school, undergraduate or graduate school and trying to find work. All that education, all those high-minded speeches about pursuing your dreams and inheriting the future and boom, smack into the worst economy since Tom Joad chewed the grapes of wrath.

What solace is there for students going through this particular agony, and their anxious parents? Well, some of the greatest businesses in the world were founded during dark economic times. Microsoft and FedEx were started in the depths of the mid-1970s recession. Thomas Edison founded General Electric during the slump of the late 1870s.

In some ways, recessions are ideal times to start a business. Rents are cheap, suppliers are biddable and hiring should be a cinch. Unfortunately, if what you have in mind is a more conventional career the news is not so good.

Antoinette Schoar, a professor at MIT’s Sloan School of Management, has studied the careers of managers who start working at different points in the business cycle. She found that chief executives who began their careers during a recession took longer to become CEO and were more likely to have risen through the ranks within one organisation than to have moved over from other industries or companies.

They also tend to be CEOs of smaller businesses and to have more conservative management styles, using less leverage and investing more in internal operations than on acquisitions.

Prof Schoar also found that CEOs who start their careers during a recession have more graduate degrees, likely a consequence of delaying their entry into the labour market in the hope of escaping the worst of it.

It may seem unfair that the economic climate that greets you in your early to mid-20s affects where you end up 25 years later. But Prof Schoar isn’t the only one saying it. Lisa Kahn, an economist at the Yale School of Management, wrote a paper last year that concluded that “graduating from college in a bad economy has a long-run, negative impact on wages”.

Why exactly isn’t entirely clear. One reason may be that people hired in a recession tend to start in lower positions and at lower wages than those who start in a boom. Even over the course of a career, that initial gap can be hard to eliminate. Another reason may be that by starting lower down, you waste time investing in skills that may be of no use later on, rather than quickly acquiring senior management abilities. Starting at the bottom may give you a good view of a company’s operations, but it also means you have a lot further to climb than someone in the boomtime rotational programme.

Warren Buffett’s snowball theory is also relevant here. The earlier you can define your skills, talents and ambitions, the longer you have to let them roll downhill, accumulating size and power. Spending those early, precious years groping for work and then rolling down snowless ground is a waste that compounds over time.

Prof Schoar has recommendations for both those starting work now and the companies that hire them. To recent graduates, she says, don’t let the job you’ve been given or the bad economic times limit you. Part of the reason that those starting out now will take longer to become CEO is that they don’t receive the broad set of experiences easily available to those who start their careers in good times. The cure for this is actively to pursue those different experiences, to demand them even in companies that are in retrenching mode. Ask to be moved to different departments, territories or functions. Don’t be inhibited by the conservatism that naturally affects companies in times like these. Your career will long outlast the gloom.

For companies, Prof Schoar warns against misattributing success. People who have thrived in good times may have glittering CVs, awash with surging numbers and promotions. But were they really any good? Or were they just lifted by a rising tide? It is important for companies to look for and reward the managers who started their careers in, say, the dotcom bust of 2001 and then helped stabilise failing businesses in 2008 or 2009. They may seem less glamorous on paper, but they will be good hires and deserve greater recognition.

In my own experience, a dose of hardship is useful for anyone. It’s the wild-eyed, boomtime gunslingers who cause the trouble, levering up, building models that misprice risk, persuading themselves and investors that the good times will never end.

It can’t be any fun starting a career today. But for those of us hoping the managers of the future behave sensibly, it’s good to know they are starting out with a large inoculation against economic madness.


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