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When CEO Star Power Backfires

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 

Bottom LineCompanies can significantly influence the media visibility of their CEO with certain kinds of press releases — but having a prominent CEO can also work to shareholders’ detriment.

When Twitter CEO Dick Costolo stepped down from his position in mid-June, media outlets around the world asked one simple question: Who could possibly follow him? Analysts suggest that steering such a groundbreaking business through a delicate post-IPO period requires a leader with a strong personality and vision, although Costolo himself has downplayed the need for a “comic book notion” of his successor.

Still, there’s little doubt that we live in the era of the star CEO. The late Steve Jobs created a cult of personality around his public appearances and dedication to innovation at Apple. The story of Facebook cofounder and CEO Mark Zuckerberg has received the Hollywood treatment. Even presidential candidate Carly Fiorina made her name as the head of Hewlett-Packard.

But are CEO media darlings made by effectively managing the press, or do they earn prominence as a result of their firm’s performance? Researchers have posited that the media tends to pay more attention to talented CEOs or those presiding over successful firms, but according to a new study, it’s not that straightforward. Companies and CEOs have a substantial ability to drive their own media narrative — occasionally to their disadvantage.

Stanford University’s Elizabeth Blankespoor and Ed deHaan analyzed more than 572,000 press releases issued by S&P 1500 firms from 2003 through 2013, as well as articles about the firms that appeared within two days of a release. They categorized the releases according to their level of CEO promotion and used computational logistics to gauge the language used in official communications. These communications ranged from statements that made no mention of the chief executive to those that contained especially clear or vivid quotes from the CEO, which are highly valued by journalists and therefore increase the likelihood of coverage.

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Large companies that actively promoted their chief executives in communications with journalists saw a more than threefold increase in the media coverage of their CEOs, the authors found. However, companies that went overboard in publicizing their chief executives eventually experienced a sharp decline in long-term performance, largely because their CEOs appeared so comfortable and entrenched in their role that they failed to seek novel solutions or think beyond the status quo.

The authors found that nearly one-third of the press releases they studied named the CEO and about one-fourth included a quote from the chief executive. Promoting the CEO in a press release was more common for economically important announcements — the type of release that makes a firm’s stock price swing considerably — and for good news. In line with the idea that firms deliberately try to build up a CEO’s public image, promotion was more prevalent during the early phases of a chief executive’s tenure, when journalists are hungry for scarce information about a shift in leadership style and when their coverage of new CEOs can significantly boost those CEOs’ visibility.

Naming the chief executive increased by 12.9 percentage points the likelihood that the reporter would also mention him or her, the authors calculated, and including a CEO quote boosted the probability of the reporter’s using that comment in an article by 12.2 percentage points. Especially clear or vivid quotes resulted in a 17.7 percentage point upturn in journalists’ including the CEO statement in their story. And intriguingly, providing a compelling quote in a press release made the media significantly more likely to rely on official statements, instead of seeking out comments from other sources.

But is CEO promotion bad or beneficial for shareholders? Given the fact that almost a quarter of press releases included a CEO quote, it seems implausible that focusing on CEOs in announcements would be detrimental. And yet Blankespoor and deHaan did find that a subset of companies over-promoted their CEOs — whether as a result of an aggressive public relations team or a chief executive who intensively courted journalists they could not tell.

Furthermore, those firms that over-publicized their CEOs tended to experience a downturn in return on assets and abnormally low stock returns for a period of up to three years into the future, compared with those companies that moderately marketed their chief executives or actively under-promoted those who sought to avoid the spotlight.

Firms that over-publicized their CEOs tended to experience a downturn in return on assets.

As a result, analysts, directors, and shareholders may want to exercise caution when attempting to equate media prominence with a CEO’s actual ability to do the job. Visibility has been found to have a positive effect on many aspects of a CEO’s career outcomes — including pay, tenure, and ability to attract high-quality executives to the company — and firm performance. But those who push themselves into the limelight too aggressively may create unrealistic expectations in the minds of shareholders or become burdened by their own celebrity, unwilling to make risky or unconventional moves because of how highly they value their own reputation.

Considering the findings that media coverage is driven in large part by companies’ strategic disclosures of information and not merely their accounting, stock performance, or CEOs’ prior media exposure, PR teams should think carefully about how to position their CEOs in the media glare — and perhaps ask them to ease back from the spotlight for the good of the company.

Source: “CEO Visibility: Are Media Stars Born or Made?” by Elizabeth Blankespoor and Ed deHaan (both of Stanford University), Rock Center for Corporate Governance at Stanford University Working Paper No. 204, May 2015

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When CEO Star Power Backfires