Study says government awards influence CEOs

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Pro­spec­tive Sirs and Dames don’t al­ways make the best CEOs, ac­cord­ing to a new study pub­lished this month by a pair of Euro­pean pro­fes­sors.

The re­search­ers con­cluded that chief ex­ec­u­tives who are can­di­dates for knight­hood or da­me­hood are more likely to make busi­ness de­ci­sions that ad­versely af­fect their com­pany’s share­hold­ers than their peers CEOs do.

CEOs who are in line to re­ceive such high hon­ors are less likely to make busi­ness de­ci­sions that are pub­licly or po­lit­i­cally un­pop­u­lar — such as lay­ing off em­ploy­ees, low­er­ing wages and re­duc­ing ben­e­fits — and that could thin mar­gins and hurt share­holder re­turns.

“[G]overn­ment awards can be used to im­ple­ment a stake­holder view of the cor­po­ra­tion to the det­ri­ment of share­hold­ers,” wrote the study’s au­thors, Linus Sim­ing of Boc­coni Univer­sity in Milan and Kon­rad Raff of VU Univer­sity Am­ster­dam.

The pair stud­ied ex­ec­u­tive be­hav­ior in New Zealand, where knight­hood and da­me­hood were elim­i­nated in 2000 be­fore be­ing re­in­tro­duced in 2009, and com­pared those firms with those led by for­eign ex­ec­u­tives who were in­el­i­gi­ble for such an honor.

When knight­hood and da­me­hood were non­ex­is­tent, firms run by New Zealand­ers out­per­formed their for­eign peers, with net mar­gins 52 per­cent higher than the con­trol group. The in­crease in prof­it­abil­ity is “ac­com­pa­nied by a de­crease in the num­ber of em­ploy­ees and the sub­se­quent low­er­ing of staff costs,” ac­cord­ing to the study.

But when those hon­ors were re­in­tro­duced, firms run by per­spec­tive Sirs and Dames suf­fered com­pared to those run by for­eign­ers. Net mar­gins were 44 per­cent lower at com­pa­nies whose ex­ec­u­tives were in line for knight­hood or da­me­hood, and statis­ti­cally there was no change in em­ploy­ment or staff costs.

The awards had the great­est ef­fect in in­dus­tries where there is lit­tle com­pe­ti­tion. In ar­eas where there is great com­pe­ti­tion, the awards had lit­tle in­flu­ence.

These hon­ors, the re­search­ers con­cluded, can serve as an ef­fec­tive way for pol­i­ti­cians to in­flu­ence cor­po­rate be­hav­ior. While pol­i­ti­cians can use a va­ri­ety of tac­tics to shape cor­po­rate ac­tiv­ity — in­clud­ing taxes, reg­u­la­tions and sub­si­dies — awards are cheaper and eas­ier to dis­trib­ute.

Taya Co­hen, an as­sis­tant pro­fes­sor of or­ga­ni­za­tional be­hav­ior and the­ory at Car­ne­gie Mel­lon Univer­sity’s Tep­per School of Busi­ness, said these awards could “cre­ate a ten­sion” be­tween an ex­ec­u­tive’s duty to do what is best for a com­pany’s share­hold­ers or to do what is best for the pub­lic at large.

“I find this ten­sion in­ter­est­ing,” Ms. Co­hen said. “Are you sat­is­fy­ing peo­ple in the or­ga­ni­za­tion, or are you look­ing more broadly to peo­ple out­side of the or­ga­ni­za­tion?”

Some of her re­search fo­cuses on the idea of group mo­ral­ity and the idea of a “good group mem­ber” who serves the goals of the group above all else.

Govern­ment awards make CEOs more aware of all stake­hold­ers — em­ploy­ees, pol­i­ti­cians and the pub­lic at large — in­stead of just the share­hold­ers.

“Cer­tain hon­ors bring with them lim­ited po­ten­tial choices, then that could be cause for con­cern” for share­hold­ers, Ms. Co­hen said. But awards also bring pres­tige and in­flu­ence, which could help coun­ter­act some of the ill-ef­fects.

Mi­chael Sanse­rino: msanse­rino@post-ga­, 412-263-1969 and Twit­ter @msanse­rino.

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