Facts about CEOs

by on September 5, 2007 at 8:19 am in Economics | Permalink

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.

RWB September 5, 2007 at 9:25 am

I think your use of the word McMansions is imprecise. The WSJ article and the abstract for the paper made it sound like it was the purchase of huge “mega-mansions” that signaled underperformance. For a CEO, a McMansion would be a modest purchase in comparison.

Henry V September 5, 2007 at 9:54 am

My favorite quote from the WSJ article (regarding privacy):

“I find it hard to imagine if I had a sick child that would be anybody’s business,” says Jerry W. Levin, chairman of Sharper Image Corp. and former CEO of Revlon Inc. “To assume that because something is going on in my personal life it’s going to affect my business — it’s crazy. I wouldn’t even ask those kinds of questions about my own employees, my own executives.”

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?

albatross September 5, 2007 at 10:25 am

Nitpick: It’s kind of annoying to have 1/5, 15%, and slightly used to describe the same variable, which I might want to compare mentally. Why not put them all in the same notation, like 20%, 15%, <5% (or whatever the right value is)?

I wonder how different the impact is for a sudden death vs. a slow death. It seems intuitively like those would be pretty different–if your wife dies suddenly in a car wreck vs. if she spends a couple years in a losing battle with cancer.

Tyler Cowen September 5, 2007 at 11:18 am

Thanks for the correction on the wording. You can all infer, correctly, that we do not live in a McMansion.

R September 5, 2007 at 11:54 am

3b. and if the CEO dies … ?

jeh September 5, 2007 at 12:16 pm

This data should (but probably won’t) show up in debates over CEO pay, specifically whether performance of firms is tied tightly enough to CEO performance that it can make outsized compensation packages a profitable move.

Marius September 5, 2007 at 12:54 pm

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.
Everyone has probably some experience with a boss who wants to be involved in every project around, but is too busy to actually look into stuff. I can easily imagine such a scenario causing results like this: plans are made for important decisions, say a new factory or a reorganization, and the CEO says “let’s wait a few months, I don’t think the organization can handle it at this moment”

Although I have to say these numbers are very, very high. If 20% value loss is the average result, imagine a CEO who is above-average ingrained in the company(say he or she has been on the job for many years), and is above-average attached to the child(say it’s the only one).

DK September 5, 2007 at 3:20 pm

R: yes, from the abstract, CEO death also hurts companies.

The paper’s take on this is very different from the WSJ article. The title is “Do CEO’s matter”, and the answer is that yes, they do, as measured by death or distraction of the CEO. So the idea is that a leave of absence won’t help, because the replacement CEO won’t be as good.

bjk September 5, 2007 at 4:38 pm

I don’t believe this for a second. The vast majority of a stock’s performance is determined by its industry or asset category.

Chris Durnell September 5, 2007 at 5:41 pm

I don’t think one can claim that proof that CEO’s can negatively impact corporate performance is the same that they produce very positive results. It is much easier to screw things up than produce excellence. I still believe that most CEOs will produce around the same results. Obviously personal tragedy will impair that individual CEO and the company will suffer from the result. But absent that externality, most candidates for a CEO position will possess the same skill sets that allow for an expected return.

As for the Mega Mansions, it can be fun to speculate as to the reasons for the correlation. One could be that some CEO’s see the company as their personal trough to pillage (through perks and compensation) as opposed to actually running the company. Mega Mansions, then, simply represent one of many forms of excess. Or it could be that at some point CEOs reach the level of compensation they desired and begin to slack off from work. Here Mega Mansions would be an indicator that the CEO has no further incentive to keep running a tight ship – he has no where to go, so he only wants to enjoy the ride now.

srp September 5, 2007 at 6:41 pm

The certainty of some commenters that CEOs don’t matter, or that they can only matter by making companies underperform, is fascinating. It is also absurd.

Aside from the empirical evidence presented here, there are strong theoretical reasons for believing that CEO quality is important. For instance, even if the CEO’s only job was to pick his own direct reports, who in turn picked their subordinates, and so on, decisions made at the apex of the organization would have tremendous leverage all the way down the hierarchy. A good or bad personnel decision by the CEO would change the quality of hiring at the next level and so on down the line. That’s not even looking at decisions about corproate boundaries, such acquisitons and divestitures, or other strategic choices where the CEO has a disproportionate influence.

fustercluck September 5, 2007 at 10:37 pm

AAPL holders: monitor Steve Jobs’ personal life *very* carefully.

Disputo September 5, 2007 at 11:56 pm

Or it could be that at some point CEOs reach the level of compensation they desired and begin to slack off from work.

IOW, they are overpaid.

srp September 6, 2007 at 9:12 pm

fuster: There’s a pretty big literature on the impact of top management teams (TMTs) in the strategic management literature. Look up Don Hambrick or Marguerite Wiersema for some indicative articles. I’m not an expert in that area, but I believe that CEO turnover is highly correlated with turnover of other members of the TMT.

As far as impact on personnel decisions go, we know from direct evidence that in most diversified firms, at least, the single biggest task of the CEO is personnel evaluation and selection. Jack Welch, for example, used to boast that he knew very little about the business activities of GE’s many SBUs but he knew a lot about the managers a couple of layers deep into the organization. Most CEOs aren’t as hands-on as Steve Jobs is on product development (thankfully, given that most of them lack Jobs’s talents in that area).

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