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.

Why long-tenured CEOs fail? The case of Nissan – Egor Matveyev

Visiting Assistant Professor of Finance, Egor Matveyev

From Nikkei Business Online

When is it time to get a new CEO? This is the question that every board of directors asks – or at least has to ask – itself every year when evaluating performance of their CEOs. While we know that CEOs get fired for really bad performance, most of the time performance is not bad enough to justify such a drastic measure. On top of that, what are the guarantees that the new CEO will be any better? Therefore, the default choice is to stick with the current CEO.

If we could identify who is a good CEO and who is a bad one, then replacement decisions would be easier. But in practice, it is a very difficult task. In my recent work with co-authors, we tried to address this question. We use state-of-the-art methodology and a large sample of CEOs to identify who is good and who is bad. Of all possible predictors of CEO quality, three factors emerged to have the strongest predictive power. These factors are CEOs’ age, tenure, and founder status. In our study, we define young CEOs as those whose age is below 58 and old CEOs as those whose age is above 65. Short-tenured CEOs are those who have been in the office for less than 8 years, and long-tenured – above 18 years. (These cutoffs – 58 and 65 for age, and 8 and 18 for tenure – are tercile breakpoints for age and tenure in our sample.)

We find that young CEOs tend to be good on average. They account for more than 4% of the market value of their firms. This means that if they leave, firm value drops by 4% on average. On the other hand, old and long-tenured CEOs tend to be bad. They destroy more than 3% of firm value, which means when they leave, firm value rises by as much as 3%. Among founder-CEOs, the age and tenure effects are even stronger. Young founders account for almost 9% of firm value, while old and long-tenured founders destroy more than 5%. These differences are striking. Our study is the first one to document such strong and heterogeneous age and tenure effects.

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Decoding CEO Pay – Robert Pozen & S.P. Kothari

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Harvard Business Review 

Each year most public companies issue reports on the pay packages of their top executives, describing how their compensation committees arrived at the numbers. These reports are part of the proxy statements sent to all shareholders, who vote on the packages. The votes are advisory or binding, depending on the country where a company is chartered.

More than 95% of the time, shareholders overwhelmingly approve the pay recommendations. Yet our research suggests that investors should be more skeptical. Compensation committees frequently adjust company performance numbers in complex and

MIT Sloan Professor SP Kothari

even obscure ways, for a variety of reasons. Sometimes, for example, they want to focus on the performance of a company’s core or continuing operations. Whatever the motive, the upshot is all too often inflated numbers, calculated on a nonstandard basis, that rationalize overly generous compensation.

Given that reality, compensation committees need to explain the basis of their decisions more clearly in their reports. For their part, investors need to develop standards and best practices for compensation design and reporting, around which they can build a meaningful dialogue with companies. Such a dialogue is critical today in view of the public’s concerns over the rising ratio of CEO pay to the average worker’s wages and of shareholders’ growing insistence that high pay be justified by superior managerial performance.

In this article we’ll review the common shortcomings of compensation committee reports, especially the use of nonstandard accounting measures and the selection of inappropriate peer companies. We’ll also propose ways in which companies and shareholders can improve their approach to determining top management’s compensation. Let’s begin by looking at an example of the problem.

Generous to a Fault

In their reports, most compensation committees identify the criteria used to award both annual cash bonuses and longer-term stock grants—usually the two largest components of executive pay. But even at the most upstanding companies, those criteria are seldom well explained.

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MIT Sloan Management Review: Sustainability contributing to company profits

Through a global survey conducted by MIT Sloan Management Review and The Boston Consulting Group, we sought to determine where exactly sustainability sits on the management agendas of the more than 2,800 companies.  It turns out that it’s prominent: more than two-thirds of companies have placed sustainability permanently on their management agenda.

Our study also found that two-thirds of companies see sustainability as necessary to being competitive in today’s marketplace, up from 55% a year earlier.  In addition, two thirds of respondents said management attention to, and investment in, sustainability has increased in the last year.

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Asst. Prof. Andrey Malenko: Types of Bidders are Key Factor in Corporate Takeovers

MIT Sloan Asst. Prof. Andrey Malenko

The market for corporate control is staggeringly large. In 2007 alone, the value of M&A transactions in the world was $4.8 trillion. Even in the wake of the economic crisis, it’s still a very active market with many complex features.

One of these features is the type of bidders involved in a corporate takeover auction. They fall into two categories: Strategic bidders such as competitors who are looking for long-term operational synergies, and financial bidders such as private equity firms and divisions of investment banks. Financial bidders are looking for financial synergies as well as for undervalued companies with the potential to improve operations.

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