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strategy and business
 / Spring 2007 / Issue 46(originally published by Booz & Company)


Recent Research

Are Celebrity CEOs Worth It?
James B. Wade ([email protected]), Joseph F. Porac ([email protected]), Timothy G. Pollock ([email protected]), and Scott D. Graffin ([email protected]), “The Burden of Celebrity: The Impact of Certification Contests on CEO Pay and Performance,” Academy of Management Journal, vol. 49, no. 4 (2006): 643–60.

Jack Welch, Steve Jobs, Louis Gerstner, Bill Gates, Larry Ellison, Andrew Grove, and Carly Fiorina are just some of the CEOs (and former CEOs) on whom the media have conferred celebrity status. But does being identified as a “star” CEO have an impact on the organization, or on the individual? And if so, is it positive or negative?

These intriguing questions were the subject of extensive research by four academics: James B. Wade, professor of management and global business at Rutgers Business School; Joseph F. Porac, the George Daly Professor in Business Leadership at New York University’s Stern School of Business; Timothy G. Pollock, associate professor in the management and organization department at Penn State University’s Smeal College of Business; and Scott D. Graffin, then a doctoral student at the University of Wisconsin–Madison School of Business (and currently an assistant professor in the department of management at the University of Georgia’s Terry College of Business).

The group collected data on 278 corporations in the S&P 500 to examine total CEO compensation and company stock market performance. They then probed whether companies led by CEOs who were the recipients of the Financial World CEO of the Year award between 1992 and 1997 fared better than those led by noncelebrity CEOs. The researchers compared company performance with average stock market returns as well as with market expectations.

The findings showed an initial gain for the organizations with the acclaimed CEOs. On the day after the announcement of the CEO contest winner, there was a slight rise — about 0.25 percent — in market return for these companies, against both the average for all companies and the expectations that existed for the companies with the celebrity CEOs.

But the CEO award also contributed to higher expectations for the companies. In the context of these elevated hopes, the results quickly turned negative. Within 30 days, actual return versus expected market return was marginally negative (negative 1.13 percent), and after eight months, significantly negative (negative 8.23 percent).

Meanwhile, honored CEOs benefit over the short and the long terms. “Winning a medal in the current year increases a CEO’s pay by approximately 10 percent,” the authors note, “and each medal awarded in the previous five years adds almost 5 percent to his/her pay.”

The findings suggest that boards expect higher performance from their star CEOs and reward them accordingly. But this confidence is mostly wrongheaded. Paying over-the-odds compensation to attract star chief executives may be a losing strategy.

Stages of Citizenship
Bradley K. Googins ([email protected]) and Philip H. Mirvis, “Stages of Corporate Citizenship: A Developmental Framework,” A Center for Corporate Citizenship at Boston College Monograph, May 17, 2006.

Implementing meaningful corporate citizenship initiatives is apparently no easy task. So says this monograph from Boston College’s Center for Corporate Citizenship, which argues that many organizations are confused by the social responsibility initiatives they are introducing. To provide a consistent framework for action, Bradley K. Googins and Philip H. Mirvis, executive director and research fellow at the center, respectively, offer five stages that companies should navigate to optimize the practice of corporate citizenship.

The center defines corporate citizenship as a company delivering on its core values in a way that minimizes harm, maximizes benefits, is accountable and responsive to key stakeholders, and supports strong financial results. The first step toward adopting this concept — the “elementary” stage — focuses on compliance, and is in line with Milton Friedman’s observation that a company’s obligation to society should be narrowly interpreted as “make a profit, pay taxes, and provide jobs.” The authors say that in the early 1990s, Nike Inc. was at this stage — that is, satisfied with creating employment in low-cost nations — when it suddenly had to contend with complaints about its labor practices.

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