On December 4, 2014, the folks at Zerohedge.com (ZH) came out with a blurb titled “Here Is The Reason Why The Average Lifespan Of US Corporations Has Never Been Shorter”. Overall, the ZH piece is another “…the end is nigh…” narrative that has been a consistent theme since their inception. The ZH team highlighted the following in reference to James Montier’s GMO article titled “World's Dumbest Idea”, “...there is one point that bears emphasis: the plunge in S&P500 corporate lifespans to record lows…”.
To be specific, Montier says, “One of the other features that stands out as having changed significantly between the era of managerialism and the era of SVM is the lifespan of a company and the tenure of the CEO. Both have shortened significantly.” Also included is the following chart from Montier’s article.
On the surface, the evidence and the claim seem to line up pretty well. As the chart demonstrates, from 1971 to the present, the lifespan of companies in the S&P 500 has consistently declined. However, there is one observation that stands out in the chart above. What makes it possible for the age of companies in the index to rise or fall within the range of the declining trend?
The age of the companies can increase or decrease simply because companies are added and dropped from the index. There is no requirement that the stocks in the S&P 500 have a minimum or maximum number of years under their belt in order to be included. Additionally, investors increasingly demand that the indexes are more reflective of the modern era rather than some bygone periods (a mistake for those who wish to have reliable index).
With this in mind, it has become the nature of the S&P 500 committee to add and drop companies with a frequency and magnitude that nullifies the point of an index. As an example, since 2003, 37% of the S&P 500 index has been added/dropped. The average number of companies dropped from the index is 15 each year.
In 2014, eight companies were added to the index. According the D&B Million Dollar Database, of the companies added to the index, the average age was 19 years. Using the same database, the companies that were dropped from the index had an average age of 64 years.
| Date | Added | Dropped | |
| 3/21/2014 | Keurig Green Mountain (1993) | WPX Energy (2011) | |
| 4/1/2014 | Essex Property (2007) | Cliff Natural Resources (2011) | |
| 6/20/2014 | Cimarex Energy (2007) | International Game Tech. (1980) | |
| 6/30/2014 | Affilliated Managers Group (1993) | Forest Laboratories (1985; Actavis) | |
| 7/1/2014 | Martin Marietta Materials (1993) | United States Steel (1901) | |
| 8/14/2014 | Mallinckrodt (1986) | Rowan (1948) | |
| 9/19/2014 | United Rentals (1997) | Graham Holdings (1877) | |
| 9/19/2014 | Universal Health Services (1979) | Peabody Energy (1883) |
As the drive and desire for performance increases, the age of corporations and tenure of CEOs in S&P 500 companies will likely decrease. Since the S&P 500 collection of companies does not act like an index, instead merely a reflection of the whims of a speculator, investors should not be alarmed with the age of companies or tenure of CEOs presented to us by S&P handlers. The changes that have occurred since 1971 are a reflection of overreaching on the part of the index managers.
The lifespan of companies in the index does not mean death and dissolution of companies dropped from the index.