Study says government awards influence CEOs

Share with others:

Print Email Read Later

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.

Join the conversation:

Commenting policy | How to report abuse
To report inappropriate comments, abuse and/or repeat offenders, please send an email to and include a link to the article and a copy of the comment. Your report will be reviewed in a timely manner. Thank you.
Commenting policy | How to report abuse

Create a free PG account.
Already have an account?

You have 2 remaining free articles this month

Try unlimited digital access

If you are an existing subscriber,
link your account for free access. Start here

You’ve reached the limit of free articles this month.

To continue unlimited reading

If you are an existing subscriber,
link your account for free access. Start here