Monday, January 10, 2005
Executive hubris
The Sports Economist points us to this article from Forbes.com. As unfortunate as it may be for a team or athlete to appear on the cover of Sports Illustrated and risk that magazine's famous jinx, it may be an equally bad idea for executives to appear on the cover of business magazines. Or perhaps the willingness to appear on the cover of a magazine is an indicator of some underlying shortcoming. In either case, the executive magazine jinx may be for real:
Notwithstanding inferior financial returns, "[superstar executives] get bigger pay increases. Total compensation, including stock and options, rose an average 39% the year after the award, compared with an average 18% gain for the media-ignored."
Lots of press coverage is therefore good for the executive who gets the coverage, even if it isn't so great for the company's stockholders.
My company has generally avoided press coverage. We have no public relations staff, outside PR firm, or budget for such things. We field press inquiries only to be courteous, and have turned down opportunities to appear on television. We would change our approach if somebody could show us how better press coverage would pay off for our stockholders. Since our customers are hospitals and surgeons, neither of which are likely to be swayed by our star turn on CNBC, it is hard to see what that pay off might be.
[T]wo economists--Ulrike Malmendier of Stanford Business School and Geoffrey Tate of Wharton--have gone beyond anecdotes. As specialists in "behavioral corporate finance," they studied the performance of 566 chief executives from 1975 to 2002. Half appeared prominently in magazines or got major business awards. The other half didn't have such high profiles, but had past company performances remarkably similar to the ones who did.
Guess what? Celebrity leads to hubris--and lower returns for shareholders.... They don't name names, but here's some of what they've found:
Return on assets at companies with "celebrity" executives deteriorated steadily for at least three years after a big award, while those with lower profiles did consistently better than the superstars.
Award winners write more books than non-winners--autobiographies, collections of self-help advice and homespun philosophy. Ghost-written or not, they're distractions from the bottom line.
The more awards a chief executive wins, the more boards he joins, leaving less time for his own directors.
Notwithstanding inferior financial returns, "[superstar executives] get bigger pay increases. Total compensation, including stock and options, rose an average 39% the year after the award, compared with an average 18% gain for the media-ignored."
Lots of press coverage is therefore good for the executive who gets the coverage, even if it isn't so great for the company's stockholders.
My company has generally avoided press coverage. We have no public relations staff, outside PR firm, or budget for such things. We field press inquiries only to be courteous, and have turned down opportunities to appear on television. We would change our approach if somebody could show us how better press coverage would pay off for our stockholders. Since our customers are hospitals and surgeons, neither of which are likely to be swayed by our star turn on CNBC, it is hard to see what that pay off might be.
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