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: email@example.com, 412-263-1969 and Twitter @msanserino.