Sunday, January 11, 2009

Superstar CEOs - a statistical perspective

Why? Why would a much-felicitated, award-winning, philanthropic, super-rich, founder-CEO do this? This is the question many ask themselves as they track the unfolding saga of Satyam's founder, Mr Ramalinga Raju who confessed this week to overstating revenues by a billion dollars.

But is there a marketing angle to this? No, no, not the overstating revenues bit, but in creating an environment where CEOs become superstars, and think they can get away with playing by rules which are, umm, different. In an excellent piece of empirical research, Mr Malmendier and Mr Tate of UC, Berkeley argue that the consequence of media-induced superstar status for CEOs is actually negative for shareholders.

Here's how it works - the CEO performs really well for a few years, and then starts to win awards given out by the media and becomes famous. He or she then starts to devote more time to activities like authoring books, playing golf, and sitting on other company boards. (This is also accompanied by an above-average increase in non-cash compensation to reflect his "star" status.) Then, because of all these distractions - which could also as per the research include increased loans from the company to the CEO, payments to his favorite charity, sponsorship of sports - the CEO doesn't devote as much time to the company as he used to. Now, to meet analyst expectations, he starts resorting to earnings management. This usually stretches to a max of 5 years after which the company starts underperforming. The important caveat however is that all of these tendencies are far more likely in companies with poor governance.

Intuitively it seems to make sense, and the authors put up an impressive mass of data to support their thesis - even golf handicaps of the top CEOs and how it increases after winning an award! The data is from the US. But the celebrity culture is taking root across the world, so it seems pretty likely that this should hold true globally though perhaps with weaker linkages in less celeb-influenced cultures.

So, should marketers stop pitching CEOs for awards? No, but it is important that the company has governance mechanisms in place to ensure that the superstar CEO doesn't have too many "star moments" and continues to work for the shareholders.

There are also those who blame the media for hyping up CEOs. This research shows that the reputable awards (which are mostly owned by media firms) do their research pretty well based on public data and the CEOs do tend to outperform their peers in the years prior to winning their major award. (Though the performance could be due to luck rather than excellence.) It is only the CEOs post-award performance that varies, and that is correlated to the presence of good corporate governance controls.

So why is a celeb-culture wrong in business but ok in other industries like films or music? The key difference is that a CEO is made a celeb by the media and the marketing team (through ads and editorial) not by the actual beneficiaries ie the shareholders or clients. This is unlike films or music where the audience has to like the product and buy it for the creator to be a celebrity. The media plays a supportive role in managing their perceptions. And when the celeb has one star moment too many - like Britney or Lindsey - the audience can drop them without any financial pain.

What can companies do to ensure that they are benefited by a celebrity CEO (and not taken for a ride)?

1. Diffuse the "star" status across a number of top management roles so that the company gets the benefit of the star-power without being dependent on any one star (and thus open to rent-seeking behaviour)

2. Create a special cadre of non-operational 'evangelists' who can be given star status without impacting the performance of the company

3. Have strict governance mechanisms in place to ensure that CEO commitment does not decline and that company resources are not diverted to the CEO's hobbies

4. Task marketing with making a clear distinction between external activities that promote the company's strategy vs those that only promote the CEO, and fund accordingly.

5. A sharp fall in the CEO's shareholding should trigger an alert to the Board that he is perhaps not as committed to the firm as before. Another empirical study suggests that a management holding of 0-5% and >25% are best for the firm.

In short, media and marketers have a role to play in restraining the rise of the celeb-CEO culture, and companies need to have a strong oversight mechanism to check the celebrity CEO.
Thanks to Dom Dada, Flick'r for the photo.


manuscrypts said...

hmm, CEOs (over a period of time) also become brands in themselves.. works well for them personally as well as for the organisation... but like many brands are discovering in the social web scenario, the basic product has to be good, and transparency is essential for retaining and increasing the brand's equity...

Manish Kapoor said...

But all said and done about super star CEOs, the question still remains that why would a founder CEO do such a thing when he clearly knows that the chances of keeping it buried forever are low?? What do you pple think?

Prasanna Jaganathan said...

"2. Create a special cadre of non-operational 'evangelists' who can be given star status without impacting the performance of the company"

IMO, a star status which is not tied to the direct contribution to the performance of the company will not hold, even with a deliberate and excellent marketing effort. If it does, that would be a coveted job profile! :-)

Jessie Paul said...

Prasanna, You are right, these are great jobs :) It should be based on past performance and the person should really be a guru. And his performance will impact the company, just that he/she won't be doing operational stuff.