Boards of directors and the media generally ‘get it right’ in rewarding CEOs based on performance, study shows
A main focus in corporate governance research is whether boards of directors and the media appropriately reward and sanction CEOs based on their performance.
Evidence shows CEOs vary significantly in their ability to generate positive firm results. While some revitalize underperforming companies, others assume the reins of successful companies only to lead them to failure.
Prior research provides a pessimistic view of boards of directors, portraying them as inefficient and unable to monitor CEOs. But many of these studies approach the problem in the wrong way, according to new research from the University of Notre Dame. The study takes a broader view of these relationships and asks the question: Do boards generally get it right? The answer, the researchers find, is yes.
“Do Boards and the Media Recognize Quality? An Assessment of CEO Contextual Quality Using Pay, Dismissal, Awards, and Linguistics” is forthcoming in the Academy of Management Journal from Timothy Hubbard, assistant professor of strategic management at Notre Dame’s Mendoza College of Business, along with Cole Short from Pepperdine University.
Boards of directors are responsible for the monitoring, rewarding and sanctioning of CEOs, while the media also plays an important role in corporate governance by distilling and disseminating key information about firms and their leaders.
“We find that boards of directors and the media do accurately reward CEOs based on their performance,” Hubbard said. “Higher-performing CEOs earn more, are dismissed less and receive more CEO media awards.”
The study looks at performance based on the impact the CEO has on the firm within the context of the performance they inherited and the time period in which they ran the firm. After establishing this relationship, it examines the signals that boards and the media may use to ascertain quality.
Using advanced linguistic methods, the researchers show that CEOs differ in the language they use. More specifically, they introduce the idea of CEO unscripted novelty, or how much a CEO deviates from the prepared portion of earnings calls in the unscripted question-and-answer portion.
They looked at CEOs and performance from the S&P 500 using company financials, media reports and earnings calls transcripts and studied CEO pay, dismissal and CEO of the Year awards. They used a separate sample to look at earnings calls and unscripted novelty and used natural language processing as a method to understand the topics CEOs discuss during their calls.
“CEO quality is positively related to unscripted novelty, which positively influences stock market reactions,” Hubbard said.
According to Hubbard, past research in this area has attempted to relate board characteristics, such as the proportion of independent directors or CEO duality, to short-term performance. He points to the study’s broader look at relationships, which he says should re-energize boards and remove some of the pessimism around their role, as well as linguistic signals that can indicate CEO quality.
“Our results should encourage board members to pay attention to the language CEOs are using in their earnings calls to understand motivations and ability based on what they say,” Hubbard said.
The study states, “Appropriate rewards for and sanctions against CEOs are important as CEOs have considerable influence over firm outcomes. Firms and society benefit when CEOs are compensated, awarded and dismissed based on their performance.”
Contact: Timothy Hubbard, 574-631-0802, thubbard@nd.edu
Latest Colleges & Schools
- Prioritizing prenatal care may decrease low birth weight outcomes in The Gambia, Notre Dame research findsA new study co-authored by University of Notre Dame researchers highlights the importance of prenatal care for improving the health of mothers and newborns, providing evidence that can inform policy.
- Partial peace deals may facilitate comprehensive accords, offering roadmap for policymakers, practitionersPartial peace agreements — deals that address targeted issues on the way to larger comprehensive accords — could provide a blueprint for peacebuilding policymakers and practitioners, according to new University of Notre Dame research.
- Notre Dame Law School launches new Veterans Law ClinicNotre Dame Law School is launching a new Veterans Law Clinic, dedicated to providing free legal assistance to U.S. military veterans in matters such as disability claims and appeals.
- City of Gary and Notre Dame’s Housing and Community Regeneration Initiative announce vision and action plan for downtown GaryThe City of Gary and the University of Notre Dame School of Architecture’s Housing and Community Regeneration Initiative announced a “Vision and Action Plan” for downtown Gary during a news conference Tuesday (May 27). The final report serves as a roadmap for Gary’s leadership to follow to reestablish the city’s building culture.
- Notre Dame Executive MBA offers scholarships to area leadersMichiana Forty under 40 honorees can receive $30,000 toward tuition for the Notre Dame EMBA program.
- Kenneth Scheve appointed dean of the University of Notre Dame’s College of Arts and LettersKenneth Scheve, the Dean Acheson Professor of Political Science and Global Affairs and the dean of social science at Yale University, has been appointed the I.A. O’Shaughnessy Dean of the College of Arts and Letters by University of Notre Dame President Rev. Robert A. Dowd, C.S.C. Scheve, who will also hold a tenured faculty position in the Department of Political Science, begins a five-year term as dean on July 1.