Fun With Statistics, CEO Life Edition

This week's Fun With Statistics comes to us via Tyler Cowen at the Marginal Revolution blog, and deals with the impact of life events on CEO performance. 

1. In Danish data, if a CEO's child dies, the value of that CEO's company falls by one-fifth in the following two years.

2. If a CEO's wife dies, the value of that CEO's company falls by fifteen percent.

3. If a CEO's mother-in-law dies, the value of that CEO's company rises slightly.

4. American CEOs with McMansions run companies which significantly underperform the market

The Danish paper is here, the McMansions paper is here.  On both studies, see today's WSJ, "Scholars Link Success of Firms to Lives of CEOs," the ungated link is here.

I'm obviously not going to comment on the mother in-law aspect, as I'm already in the dog house thanks to some previous posts.  The point is that CEO's are people, and life events do have an impact.  As one person commented,

Certainly people are entitled to privacy. But, to suggest that the death of a child would *not* affect someone's performance... *that's* crazy. I know it certainly would affect my own job performance, and for that reason I might take a temporary leave of absence. What kind of person would you need to be for it not to affect your performance?

But some of the more interesting comments deal with the power and influence of the CEO.  Is a strong CEO better than one that governs via consensus?  Which is more important, to what type of company, in what situation, and which type creates more risk for the company's value?

Most of these effects are negative: the company underperforms when the the CEO is distracted. It is possible to argue that this shows that CEOs are extremely valuable to the company, but it could just as well be argued that it shows that CEOs have too much influence on their companies.

And

Perhaps firms in Denmark tend to be more closely tied to the CEO, either because he is one of the founders or because of the size of the firm, or because of the way the management of the firm is structured.

In the US, CEO's tend to be fairly interchangeable these days and it is rare for their tenure to exceed five years. There are some notable exceptions such as chain-saw Al and Neutron Jack, but in general a change of CEO doesn't seem to do much over the long term. This is one of the criticisms of American CEO's they seem to be more interested in feathering their nest and getting out quickly rather than running the firm for the long-term benefit of all the stakeholders.

Another useful comparison would be with Japan where top decisions tend to be much more based upon consensus and not as dependent on the American Superstar model.

It's seem a bit odd that most political philosophers support the ideas of a democratic form of government, but none of them comment on the fact that all private firms are run as a type of dictatorship. Even the (nominal) control of a board of directors means nothing and the ability of the stockholders to replace them is essentially impossible.

The lesson?  Strong CEO's do not need to be dictatorial, strong CEO's can create consensus.  And strong CEO's are always working to develop managerial bench strength so they become less and less critical to the long-term success of the organization.

Comments

[John Hunter]

Wouldn't being "less and less critical to the long-term success of the organization" make it more and more difficult to justify salaries that would make a King jealous? If the USA CEO's are less critical why are the USA CEO's paid the highest (and most unbelievable crazy) amounts? I have thought for years CEO pay in the USA has nothing to do with their "worth," this seems one more piece of evidence for that belief.

Today, in the USA, CEOs are basically win the lottery when they start and then either win some more and stay or don't win and are let go. The lottery performance appraisal aspect Deming talked about (rewarding whoever random variation or macro economic and micro economic trends smiled upon during the period). Though we now have to recalibrate Deming's comments to say regular performance appraisal raffle winners (CEO's are the ones winning $40,000,000 - lottery sized - annual pay).