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More than 40 percent of CEOs take it personally, study finds

August 1, 2009

For more information, contact: Benjamin Haimowitz,

Ask CEOs of the biggest U.S. companies whether they identify with the firms they head, and a plurality say they do. In research presented at the annual meeting of the Academy of Management, in Chicago, August 9-11, about 40% of approximately 800 CEOs who were surveyed affirmed (about one third of them strongly) that the company was a "major part" of who they were. Another 30% denied that was the case, and the remaining 30% were somewhere in between.
As it turns out, a lot can ride on the answer. CEOs who identify strongly with their companies are far less likely to "pursue actions that advance their interests at the expense of the organization and its stakeholders," the study reveals. For example, they are about two thirds less likely to make personal use of corporate aircraft than chiefs with a weak sense of company identification.
"One might expect that a CEO who identifies strongly with his or her firm will see nothing wrong with using the company resources for personal use, but our findings suggest the opposite to be the case," comments James Westphal of the University of Michigan, a co-author of the study with Steven Boivie of the University of Arizona, Donald A. Lange of Arizona State University, and Michael McDonald of the University of Central Florida. "What we found instead," he adds, "is that such executives tend to shun lavish perquisites that shareholders and the public resent, perks which, in fact, have been shown to be associated with significant underperformance of company stock."
CEOs with strong company identification also tend to avoid corporate strategies that are likely to be at odds with the interest of shareholders. For example, they are less than half as likely as CEOs with weak company identification to increase their companies' level of unrelated diversification, a strategy that the study characterizes as "a form of corporate empire-building...associated with lower financial performance, lower stock prices, and greater institutional pressure to divest."
The findings emerge from survey responses by 793 CEOs whose companies are among the largest 2000 US firms. At the heart of the survey were seven statements gauging "the degree to which the CEO defines him/herself in terms of the organization" -- for example, "When someone criticizes [organization], it feels like a personal insult," or "When I talk about [organization], I often say 'we' rather than 'they,' " or "If a story in the media criticized [organization], I would feel embarrassed, whether or not I know the person," or "Being a member of [organization] is a major part of who I am."
CEOs were asked to choose a response ranging from one to five: 1-strongly disagree; 2-somewhat disagree; 3-neither agree nor disagree; 4-somewhat agree; and 5-strongly agree. The answers were combined to provide a measure of the extent of CEO identification with the company, which was analyzed in terms of its relationship with two variables -- personal use of corporate aircraft and extent of the company's unrelated diversification.
The professors then took their analysis one important step further by assessing the efficacy of what has become a sine qua non of contemporary corporate governance: enhancing board independence so as to increase board vigilance in monitoring the CEO. The research reveals that, when CEOs identify strongly with their companies, board independence is largely beside the point, neither having much effect on whether CEOs make personal use of corporate aircraft or pursue a strategy of unrelated corporate diversification.
As the study puts it, "With high CEO organizational identification, those extrinsically oriented controls may be practically redundant."
Those controls can also be quite expensive, the study notes. In the professors' words, "Vigilant monitoring by independent directors creates significant costs, for example, in that it requires outside directors to devote considerable time and energy to monitoring -- time and energy that might otherwise be available for other critical activities, including succession-planning, engaging in strategic decision-making and providing advice and counsel to the CEO."
At the same time, the professors concede that "when CEO  organizational identification is relatively low, it may make sense for firms to maintain higher levels of board independence."
The study seems likely to add to Prof. Westphal's standing as one of the most prominent skeptics on the value of imposing what he calls "extrinsic controls" on top corporate executives. In a paper published in the Academy of Management Journal 10 years ago, for example, he found that firms were better served by boards that were close to CEOs than boards which studiously kept their distance, provided that top executives had more than minimal financial stakes in their companies. In other words, increasing the amount of board independence and increasing top executives' financial stakes in their companies were largely redundant. The new study finds board independence redundant too for the substantial number of CEOs who "engage in a behavior because it is inherently satisfying and not because it brings external rewards or avoids external sanctions."
"A practical implication," the new study concludes "is that a one-size-fits-all approach to corporate governance is misguided. While a safe assumption may be that CEOs will maximize their own self-interests, it is not safe to assume that CEOs are uniform in terms of what they consider to be their self-interests."

The new study, entitled "Me or We: The Effects of CEO Organizational Identification on Agency Costs," was among several thousand research reports at the Academy of Management meeting, held in Chicago from August 9 to 11th.  Founded in 1936, the Academy is the largest organization in the world devoted to management research and teaching. It has close to 19,000 members in 102 countries, including more than 10,000 in the United States. This year's annual meeting drew more than 9,000 scholars and practitioners for sessions on a host of subjects relating to business strategy, corporate organization and investment, the workplace, technology development, and other management-related topics.

Media Coverage: Firmly hooked: Is it good if bosses feel strongly for the firm?. (Tuesday, August 11, 2009).
Harvard Business Publishing. Daily Stat: CEOs with deep liinks to the firm shun perks. (Tuesday, November 17, 2009). What comes first for Indian CEOs - company or self?. (Wednesday, November 18, 2009).

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