Companies with visionary leaders are hurt if the CEO and chairman roles are split – Egor Matveyev

Visiting Assistant Professor of Finance, Egor Matveyev

From MarketWatch

A number of recent corporate scandals put a renewed focus on the dual role of CEOs serving as chairmen of the board of directors.

Carlos Ghosn of the Renault-Nissan-Mitsubishi Alliance is currently jailed in Japan on charges of under-reporting his pay. Facebook’s FB, -2.22%  Mark Zuckerberg has been criticized on how he managed recent crises, and has been called on to step down from the chairman post. Tesla’s TSLA, -3.96%  Elon Musk had to resign from the chairman role as part of the settlement agreement reached with the Securities and Exchange Commission in its investigation into Musk’s erratic communication through social media, which might have misled investors.

In recent years, the number of CEOs in a dual CEO-chairman role in large U.S. firms has been steadily declining. In the mid-1990s, about 65% of all firms were led by CEOs who were also chairmen. Most recent data from fiscal 2017 show that this number is down to 41%. Given the public pressure to separate CEO and chairman positions in publicly traded firms, this downward trend is expected to continue.

Advantages, disadvantages

There are many potential benefits that come from splitting the roles of the CEO and the chairman. First, it puts checks and balances in place, and ensures that important decisions are weighted and, if needed, challenged. Second, it sends a signal to all stakeholders — employees, business partners and shareholders — that the firm has two centers of power, and therefore is likely to be more stable. Third, it shows that the firm is more likely to be equitable, which may increase its appeal in the eyes of customers, prospective employees and business partners.

While the benefits are frequently discussed, costs are rarely mentioned. In my recent work with co-authors, we show that having additional power amplifies the effect of both good and bad CEOs on firm value and performance. It means that if the firm is single-handedly run by a powerful CEO, disastrous events, such as suspected fraud in the case of Nissan or misleading investors through social media in the case of Tesla, are more likely to happen. On the flip side, however, it also means that strong, visionary leaders benefit from being able to run their firms as they see fit and having their business decisions unchallenged. Many of the great success stories, such as Apple AAPL, -0.87% (under Steve Jobs, until his death in 2011), Amazon AMZN, -0.72% (Jeff Bezos) and Netflix NFLX, -1.50%(Reed Hastings) are all associated with powerful chairmen-CEOs. As we know, the ability to move fast and execute is critical in fast-moving industries.

Effect on shareholders

We show that these amplification effects of powerful CEOs on shareholder value are very large. For example, while good CEOs on average account for 4% of their firms’ value, good CEOs who have more power account for as much as 9%. Conversely, while bad CEOs on average can destroy up to 3% of shareholder value, bad CEOs with more power destroy more than 5%.

Read the full post at MarketWatch.

Egor Matveyev is a Visiting Assistant Professor of Finance at the MIT Sloan School of Management.

Keep quarterly reporting – Robert Pozen

From CFO

On August 17, President Trump waded into another complex area by a short tweet. He had apparently asked several top business leaders how to “make business (jobs) even better in the United States.” He then directed the Securities and Exchange Commission to study one business leader’s reply: “Stop quarterly reporting and go to a six-month system.”

Trump’s tweet reflects the belief of many corporate executives and commentators that quarterly reporting pushes public companies away from attractive long-term investments. However, the long-term benefits of semi-annual reporting are doubtful, while its costs are significant.

Shifting company reports to every six months does not meet anyone’s definition of the long-term. An extra three months to announce financial results would not induce American executives to take off the shelf the hypothetical stockpile of long-term, job-creating projects — now allegedly stymied by quarterly reporting.

For years, public companies like Amazon have achieved large market capitalizations by following long-term strategies, as investors waited patiently. Indeed, most biotechs go public successfully without any history of profits, so investors must be endorsing their plans for completing clinical trials and marketing their drugs.

Read More »

With better leadership, Sears could’ve been a contender – Sharmila Chatterjee

MIT Sloan Senior Lecturer Sharmila Chatterjee

MIT Sloan Senior Lecturer Sharmila Chatterjee

From The Hill

When I arrived in the U.S. for graduate school in the mid-1980s, I asked my host family in a Philadelphia suburb where to shop to outfit my dorm room. They didn’t skip a beat: “Sears,” they said. “It has everything you need.”

To say that I was in awe of Sears would be an understatement. Having grown up in small cities in India that were dominated by mom and pop stores, I’d never seen anything like it. I bought pillows and bed sheets; a hot pot, microwave, a mini fridge; and also rain boots, socks, and a pair of earrings. I remember thinking, “This is the American store of my dreams.”

So last week’s news that Sears filed for bankruptcy struck a personal chord. The company has been under pressure for years: shuttering stores, jettisoning assets and taking on ever more debt. Finally, facing a $134 million payment that it could not afford, Sears capitulated.

The main culprit, according to media coverage, was the rise of online shopping and Amazon. Amazon, of course, has become the familiar villain in these tales — allegedly responsible for the death of many once-dominant American retailers, from Toys “R” Us to Sports Authority to Radio Shack.

But considering e-commerce accounts for only 9 percent of all retail sales, that explanation rings hollow. The truth is, Sears’s bankruptcy is of its own making. Its management, led by Eddie Lampert — Sears’s chairman and its biggest individual creditor and shareholder, made a series of missteps that ultimately crippled the iconic chain.

These include focusing too narrowly on cutting costs at the expense of investing in the in-store experience, spinning off key brands and competing on price.

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Retailers need to get real about security – Lou Shipley

MIT Sloan Lecturer Lou Shipley

MIT Sloan Lecturer Lou Shipley

From Xconomy

It seems a distant memory now. In December 2013 – light years ago in technology time – the retail giant Target disclosed a massive software security breach of its point of sale systems. The bad guys fled the virtual premises with the credit card information of 40 million customers. This astounding number would later rise to 70 million customers.

Target’s embarrassment, its loss of market share, its brand erosion, and its legal costs to settle claims collectively should have served as a nerve-jangling wakeup call for retailers large and small nationwide.

It would be hopeful to believe that retailers learned from Target’s data breach, but in fact the opposite has happened. In 2016, retail software security breaches were up 40 percent over the prior year and in 2017 the following familiar brand names suffered breaches – Sonic, Whole Foods Market, Arby’s, Saks Fifth Avenue, Chipotle, Brooks Brothers, Kmart, and Verizon. Retail software security is getting worse, not better, and the dismal trend seems likely to continue in the near term. Why? Read More »

Viewpoint: How can department stores survive in the digital era? – Sharmila C. Chatterjee

MIT Sloan Senior Lecturer Sharmila Chatterjee

MIT Sloan Senior Lecturer Sharmila Chatterjee

From Boston Business Journal

How can a department store survive in the age of digital shopping carts and free home delivery? It’s a question that some of even the most iconic retailers struggle to answer.

As a result, many are closing up shop. Last month, for instance, Macy’s identified seven stores for closure as part of its previously announced plan to shutter 100 locations nationwide. In November, Sears said it would close 63 stores on top of the 350 that it announced would shut earlier in the year. And last summer, J.C. Penney closed about 140 of its stores around the country.

Closing less-profitable locations makes a lot of sense, but that alone is not enough. What’s needed is a reinvention of the traditional bricks-and-mortar model. Stores must rekindle the magic of department store shopping by providing a holistic customer experience, one that’s efficient and satisfying from a purchasing point of view, but also engaging and exciting.

For starters, brick-and-mortar stores need to change how they view their online counterparts: digital stores should be seen as complementary forces rather than competitive ones. Shopping in the future will be a blend of the electronic and physical realms. Read More »