The differential effects of CEO narcissism and hubris on corporate social responsibility

Research Summary: While prior studies have predominantly shown that CEO narcissism and hubris exhibit similar effects on various strategic decisions and outcomes, this study aims to explore the mechanisms underlying how narcissistic versus hubristic CEOs affect their firms differently. Specifically, we investigate how peer influence moderates the CEO narcissism/hubris—corporate social responsibility (CSR). With a sample of S&P 1500 firms for 2003–2010, we find that the positive relationship between CEO narcissism and CSR is strengthened (weakened) when board‐interlocked peer firms invest less (more) intensively in CSR than a CEO's own firm; the negative relationship between CEO hubris and CSR is strengthened when peer firms are engaged in less CSR than a CEO's own firm. Managerial Summary: Some CEOs are more narcissistic while others may be more hubristic, but these two groups of CEOs hold different attitudes toward the extent to which their firms should engage in corporate social responsibility (CSR). Our findings with a large sample of U.S. publically listed firms suggest that narcissistic CEOs care more about CSR, but hubristic CEOs care less. Interestingly, when narcissistic CEOs observe their peer firms engaging in more or less CSR than their own firms, they tend to respond in an opposite manner; in contrast, hubristic CEOs will only engage in even less CSR when their peers also do not emphasize CSR. Our findings point to a fundamental difference between CEO narcissism and hubris in terms of how they affect firms' CSR decisions based on their social comparison with peer firms.     

Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal

Research summary: Investing a firm's resources in corporate social responsibility (CSR) initiatives remains a contentious issue. While research suggests firm financial performance is the primary driver of CEO dismissal, we propose that CSR will provide important additional context when interpreting a firm's financial performance. Consistent with this prediction, our results suggest that past CSR decisions amplify the negative relationship between financial performance and CEO dismissal. Specifically, we find that greater prior investments in CSR appear to expose CEOs of firms with poor financial performance to a greater risk of dismissal. In contrast, greater past investments in CSR appear to help shield CEOs of firms with good financial performance from dismissal. These findings provide novel insight into how CEOs' career outcomes may be affected by earlier CSR decisions. Managerial summary: In this study, we examined a potential personal consequence for CEOs related to corporate social responsibility (CSR). We explored the role prior investments in CSR play when a board evaluates the firm's financial performance and considers whether or not to fire the CEO. Our results suggest that while financial performance sets the overall tone of a CEO's evaluation, CSR amplifies that baseline evaluation. Specifically, our results suggest that greater past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when financial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when financial performance is good. Thus, striving to deliver profits in a socially responsible manner may have both positive and negative personal consequences. Copyright © 2017 John Wiley & Sons, Ltd.     

Going short‐term or long‐term? CEO stock options and temporal orientation in the presence of slack

Research summary: We draw on behavioral agency theory to explain how decision heuristics associated with CEO stock options interact with firm slack to shape the CEO's preference for short‐ or long‐term strategies (temporal orientation). Our findings suggest CEO current option wealth substitutes for the influence of slack resources in encouraging a long‐term orientation, while prospective option wealth enhances the positive effect of slack on temporal orientation. Our theory offers explanations for non‐findings in previous analysis of the relationship between CEO equity based pay and temporal orientation and provides the insights that CEO incentives created by stock options (1) enhance the effect of available slack upon temporal orientation and (2) can both incentivize and de‐incentivize destructive short‐termism, depending upon the values of current and prospective option wealth. Managerial summary: We explore how compensation design can play a role in affecting the CEO's preference for short‐ or long‐term strategic projects. When the CEOs have accumulated option wealth, they are more likely to invest in the long term. Yet when they have a large number of recently granted options with the potential to generate significant wealth in the event of successful risk taking, the CEO is more likely to prefer the short term in order to achieve personal wealth gains more quickly. The more liquid assets the firm holds, the weaker both of the aforementioned effects. An implication for boards is that they should anticipate CEO short‐termism if the CEO has been granted new options, underlining the potential negative consequences of option compensation. Copyright © 2015 John Wiley & Sons, Ltd.     

Increase in takeover protection and firm knowledge accumulation strategy

Research summary : We argue that the extent to which a firm faces takeover threats affects its knowledge structure. In particular, takeover threats may lead to managers' reluctance to adopt a strategy toward firm‐specific knowledge accumulation because implementing this strategy requires them to acquire specialized skills, which are at risk under takeover threats. Conversely, takeover protection leads to an increase in firm‐specific knowledge. Further, the relationship between takeover protection and firm‐specific knowledge is positively moderated by managerial ownership, which helps align managerial interests with those of shareholders. But the relationship is negatively moderated by managerial tenure, as long‐tenured managers have already committed to their firms. Using a differences‐in‐differences method with Delaware antitakeover rulings in the mid‐1990s as an exogenous shock, we found results supporting these arguments. Managerial summary : We examined how changes in the Delaware antitakeover rulings in mid‐1990s affected the knowledge structure of firms incorporated in Delaware. We reasoned that with a greater level of takeover protection, top managers of those firms incorporated in Delaware felt higher job security, thus providing them stronger incentives to make strategic decisions toward the development of firm‐specific knowledge and to make corresponding human capital investments in specialized skills. Empirically, firms incorporated in Delaware were found to have an increase in the level of firm‐specific knowledge in their knowledge structure after the mid‐1990s. Furthermore, our analysis suggests that the role of takeover protection on top manager incentives is particularly salient when the managers are awarded with more company shares and when the managers have shorter organizational tenure. Copyright © 2015 John Wiley & Sons, Ltd.     

Equity‐based incentives and collaboration in the modern multibusiness firm

Research summary : This paper examines the role of equity‐based incentives in fostering cross‐business‐unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business‐unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers' efforts with the firm's growth prospects and organization structure and managing the dual risks in profits and firm market value. The inclusion of equity incentives elicits higher levels of own‐unit and collaborative efforts over the profits‐only contract. Our results suggest that equity‐based incentives are most beneficial when profitability is uncertain relative to long‐term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets. Managerial summary : Equity‐based compensation such as restricted stock grants and options are increasingly common, not only for CEOs and other top executives, but also for business unit managers and other non‐C‐suite employees. The paper studies the role of such “global” incentives in enabling multibusiness firms to benefit from cross‐unit collaboration. Results from our model show that managerial contracts that include appropriate levels of equity incentives, in addition to profit‐based incentives, generate higher own‐unit and collaborative efforts. We also find that equity incentives are likely to be most beneficial for large firms in high‐growth sectors, for firms pursuing a related diversification strategy, and in periods of rising stock markets. The model can also provide useful guidance on designing return‐maximizing compensation contracts for business unit managers in different firm, organizational, and industry contexts. Copyright © 2015 John Wiley & Sons, Ltd.     

How quickly do CEOs become obsolete? Industry dynamism,CEO tenure,and company performance

Scholars have characterized CEO tenures as life cycles in which executives learn rapidly during their initial time in office, but then grow stale as they lose touch with the external environment. We argue, however, that the opportunities for adaptive learning are limited because (1) a CEO assumes office with a relatively fixed paradigm that changes little thereafter; (2) inertia limits the speed at which an organization can align itself with a new CEO's paradigm; and (3) for any within‐paradigm learning to occur, the external environment must be stable enough so that the cause–effect relationships that CEOs glean today remain relevant tomorrow. In a longitudinal study of 98 CEOs in the relatively stable branded foods industry and 228 CEOs in the highly dynamic computer industry, we found results that strongly supported our hypotheses. In the stable food industry, firm‐level performance improved steadily with tenure, with downturns occurring only among the few CEOs who served more than 10–15 years. In contrast, in the dynamic computer industry, CEOs were at their best when they started their jobs, and firm performance declined steadily across their tenures, presumably as their paradigms grew obsolete more quickly than they could learn. Copyright © 2006 John Wiley & Sons, Ltd.     

The accentuated CEO career horizon problem: evidence from international acquisitions

We develop a conceptual model of the career horizon problem of CEOs approaching retirement and discuss its implications on firm risk taking, specifically in engagement in international acquisitions. Based on prospect theory and agency theory, we emphasize the legacy conservation and wealth preservation concerns of CEOs and investigate how their holdings of in‐the‐money unexercised options and firm equity accentuate or mitigate the career horizon problem. The model is tested in the context of international acquisitions with a sample of 293 U.S. firms over a five‐year period (1995–1999). We find that a longer CEO career horizon is associated with a higher likelihood of international acquisitions. We also find that CEOs nearing retirement with high levels of in‐the‐money unexercised options and equity holdings are less likely to engage in international acquisitions than CEOs with low levels of in‐the‐money options and equity holdings. The study raises important considerations about the implications of CEOs' equity and in‐the‐money option holdings on firm risk taking at various stages of their career horizon. Copyright © 2008 John Wiley & Sons, Ltd.     

Red,blue, and purple firms: Organizational political ideology and corporate social responsibility

Research summary : Why do firms vary so much in their stances toward corporate social responsibility (CSR )? Prior research has emphasized the role of external pressures, as well as CEO preferences, while little attention has been paid to the possibility that CSR may also stem from prevailing beliefs among the body politic of the firm. We introduce the concept of organizational political ideology to explain how political beliefs of organizational members shape corporate advances in CSR . Using a novel measure based on the political contributions by employees of Fortune 500 firms, we find that ideology predicts advances in CSR . This effect appears stronger when CSR is rare in the firm's industry, when firms are high in human capital intensity, and when the CEO has had long organizational tenure . Managerial summary : Why do firms vary in their stances toward corporate social responsibility (CSR )? Prior research suggests that companies engage in CSR when under pressure to do so, or when their CEOs have liberal values. We introduce the concept of organizational political ideology, and argue that CSR may also result from the values of the larger employee population. Introducing a novel measure of organizational political ideology, based on employees' donations to the two major political parties in the United States, we find that liberal‐leaning companies engage in more CSR than conservative‐leaning companies, and even more so when other firms in the industry have weaker CSR records, when the company relies heavily on human resources and when the company's CEO has a long organizational tenure . Copyright © 2016 John Wiley & Sons, Ltd.     

Firm‐specific knowledge assets and employment arrangements: Evidence from CEO compensation design and CEO dismissal

Research summary : We argue that firms with greater specificity in knowledge structure need to both encourage their CEOs to stay so that they make investments with a long‐term perspective, and provide job securities to the CEOs so that they are less concerned about the risk of being dismissed. Accordingly, we found empirical evidence that specificity in firm knowledge assets is positively associated with the use of restricted stocks in CEO compensation design (indicating the effort of CEO retention) and negatively associated with CEO dismissal (indicating the job securities the firm committed to CEOs). Furthermore, firm diversification was found to mitigate the effect of firm‐specific knowledge on both CEO compensation design and CEO dismissal, as CEOs are more removed from the deployment of knowledge resources in diversified firms. Managerial summary : A firm's knowledge structure, that is, the extent to which its knowledge assets are firm‐specific versus general, has implications for both CEO compensation design and CEO dismissal. In particular, we find that a firm with a high level of firm‐specific knowledge has the incentive to retain its CEO through the use of restricted stocks in CEO compensation. Such a firm is also likely to provide job security for its CEO, leading to a lower likelihood of CEO dismissal. These arguments, however, are less likely to hold in diversified corporations as CEOs in such corporations are more removed from the deployment of knowledge assets. A key managerial implication is that CEO compensation and job security design should be made according to the nature of firm knowledge assets. Copyright © 2016 John Wiley & Sons, Ltd.     

Strategy,human capital investments,business‐domain capabilities,and performance: a study in the global software services industry

Research summary : In knowledge‐based industries, continuous human capital investments are essential for firms to enhance capabilities and sustain competitive advantage. However, such investments present a dilemma for firms, because human resources are mobile. Using detailed project‐level operational, financial, and human capital data from a leading multinational firm in the global IT services industry, this study finds that deliberate investments in improving general human capital can help firms develop superior capabilities and maintain high profits. This paper identifies two types of capabilities essential for success in this industry—technological and business‐domain capabilities—and provides empirical evidence justifying such investments. Theoretical and practical implications of capability‐seeking general human capital investments are discussed. Managerial summary : The primary managerial implication of this research is that capability‐seeking investments in developing general human capital through strategic learning (training and internal certifications) can enhance firm performance. Although investing in general human capital is risky, the firm considered this a strategic necessity in order to thrive in the fast paced IT services industry. By leveraging general technological skills in combination with business‐domain knowledge to address customer's business problems firms can earn and sustain higher profits. Our study also demonstrates how a developing‐country firm responded to strong competitive challenge from global rivals possessing superior capabilities by upgrading the capabilities of its employees through internal development. In doing so the firm was able to narrow the capability gap vis‐à‐vis its foreign peers and expand its business globally. Copyright © 2016 John Wiley & Sons, Ltd.     

Earthquake or glacier? How CEO charisma manifests in firm strategy over time

Numerous studies have focused on CEO charisma as an antecedent to firm performance, but this literature has largely overlooked the possibility that charisma manifests in more proximal strategic initiatives that (unlike performance) are largely under the CEO's control. In this study, we integrate perspectives from the upper echelons and charismatic leadership literatures to argue that CEO charisma influences year‐over‐year strategic change, the degree to which strategies deviate from industry central tendencies, and the degree of emphasis on corporate social responsibility. We also theorize that, depending on the outcome in question, the effects of charisma can become both amplified and diminished as CEO tenure advances. Employing a novel data collection approach for a sample of 113 S&P 500 CEOs, we find broad support for our theory. Copyright © 2014 John Wiley & Sons, Ltd.     

Real options and real value: the role of employee incentives to make specific knowledge investments

Real options reasoning emphasizes the strategic value of making flexible investments in a turbulent environment. Employees' investments in specific human capital are often critical to the success of a real option project, but the very flexibility that allows a firm to change course in response to new information also affects employees' incentives to make such specific human capital investments. We develop a model of real option investment that explicitly incorporates the role of employee incentives. The model suggests that the effect of investing in a real option project on employee incentives may be positive, further increasing the value of the project, or negative, sometimes more than offsetting the benefit of flexibility and resulting in reduced project value. Therefore, firms and managers should take into consideration the role of employee incentives when applying real options logic to investment decision making. Copyright © 2008 John Wiley & Sons, Ltd.     

A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk

This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.     

Does a long‐term orientation create value? Evidence from a regression discontinuity

Research summary : In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time‐based” agency conflict between shareholders and managers. Managerial summary : This paper shows that corporate short‐termism is hampering business success. We show clear, causal evidence that imposing long‐term incentives on executives—in the form of long‐term executive compensation—improves business performance. Long‐term executive compensation includes restricted stocks, restricted stock options, and long‐term incentive plans. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright © 2016 John Wiley & Sons, Ltd.     

Who does private equity buy? Evidence on the role of private equity from buyouts of divested businesses

Research Summary: We examine the role of nonventure private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high‐powered incentives, patient capital, and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents’ core area, whose rivals invest more in long‐term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form. Managerial Summary: Private equity firms are often portrayed as destroyers of corporate value, raiding established companies in pursuit of short‐term gain. In contrast, we argue that private equity investors help to revitalize businesses by enabling investments in long‐term strategic resources and capabilities that they are better able to evaluate, monitor, and support than public market investors. Consistent with these arguments, we find that when acquiring businesses divested by public corporations, private equity firms are more likely to buy units outside the parent's core area, those whose peers invest more in R&D than their parents, and those whose parents have weak managerial incentives, especially at the divisional level. Thus, private equity firms systematically target those businesses that may fail to realize their full potential under public ownership.     

Once an outsider,always an outsider? CEO origin,strategic change,and firm performance

In this study, we examine how the relationship between the level of strategic change in the pattern of resource allocation and firm performance differs between firms led by outside CEOs and those led by inside CEOs. Based on longitudinal data on the tenure histories of 193 CEOs who left office between 1993 and 1998, we find that the level of strategic change has an inverted U‐shaped relationship with firm performance. As the level of change increases from slight to moderate, performance increases; as the level of change increases from moderate to great, performance declines. Further, we find that this inverted U‐shaped relationship differs between firms led by outside CEOs and those led by inside CEOs. That is, both the positive effect of strategic change on firm performance when the level of change is relatively low and the negative effect of strategic change on firm performance when the level of change is relatively high are more pronounced for outside CEOs than for inside CEOs. Supplementary analyses also suggest that this difference between outside and inside CEOs exists in later years but not in the early years of CEO tenure. Copyright © 2009 John Wiley & Sons, Ltd.     

CEO incentives,innovation, and performance in technology‐intensive firms: a reconciliation of outcome and behavior‐based incentive schemes

Building on the agency view of corporate governance, we propose that technology‐intensive firms use both outcome and behavior‐based performance criteria for rewarding CEOs. Using a sample of 206 firms from 12 U.S. manufacturing industries, we find that as technological intensity increases CEO bonuses are more closely linked to financial results and that total CEO incentives are associated with two indicators of desirable innovation behaviors: invention resonance and science harvesting. Invention resonance refers to the impact a firm's inventions have on other firms' inventions, while science harvesting reflects a firm's commitment to scientific research. As technological intensity increases, aligning bonus with financial results, total incentives with invention resonance, and total incentives with science harvesting predict firm market performance. Copyright © 2006 John Wiley & Sons, Ltd.     

Constraints and incentives for making long horizon corporate investments

This paper examines the conditions under which firms make long horizon investments (i.e., investments that take a long period of time to pay off). We predict firms are constrained from making long horizon investments when short‐term performance is poor—and this effect is especially pronounced for young firms. Moreover, we argue that when managers hold high levels of exercisable stock options, their firms are less likely to make long‐term investments. However, firms are more likely to pursue long horizon investments when managerial stock options are not yet exercisable. Based on analysis of investments made by cable television operators from 1972–1996, we find support for these predictions. In addition to enhancing our understanding of investment choices, these results—derived from the temporally focused analysis of an investment's payoff horizon—suggest that payoff horizon is an important investment attribute in its own right and should be analyzed distinctly from and in addition to other aspects of investments, such as expected return and risk. Copyright © 2010 John Wiley & Sons, Ltd.     

Stepping across for social approval: Ties to independent foundations' boards after financial restatement

Research Summary: Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non‐restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non‐restating peers. Our study offers a nuanced analysis of the post‐crisis actions of restating firms relative to non‐restating peers and highlights the relevance of ties to nonprofit boards for corporate governance. Managerial Summary: Firms oftentimes fire their top executives in the aftermath of misconduct, but such response is itself disruptive for the firm's operations. Instead, we suggest that forging ties to independent foundations can help firms in such contexts without unsettling effects. Our results show that, after a restatement event, CEOs of misconduct firms are especially likely to join new foundation boards as trustees and thus seem to be aware of the benefits of these associations. CEOs from firms with existing in‐house philanthropy or a high reputation do not join as many new foundations' boards of trustees. We also find that new firm‐foundation links are promptly and positively evaluated by the media, thus helping misconduct firms regain social approval.     

How stigmatized are dismissed chief executives? The role of character questioning causal accounts and executive capital in dismissed CEO reemployment

Research Summary: Despite the prevalence of CEO dismissal, theory only briefly explores its consequences. Past research indicates few fired CEOs regain employment. We suggest dismissal stigmatizes executives; however, stigmatization is greatest when character questioning causal accounts exist, which affect the likelihood of regaining a CEO position. Furthermore, we argue that reputational and social capital provide signals of executive quality that moderate the level of stigmatization experienced when character questioning causal accounts exist. Following 280 dismissed CEOs, we find that social capital increases the likelihood of rehiring for those with character questioning causal accounts, but negatively impacts those without causal accounts. Alternatively, we find reputational capital positively influences those without causal accounts, while having a slight negative relationship for those with causal accounts. Managerial Summary: Dismissed CEOs often desire second chances to run companies; however, few are ever afforded the opportunity. We explore what allows some dismissed CEOs to regain employment as a CEO. We find that reasons surrounding a CEO's dismissal influence such prospects depending on the CEO's prior reputation and social capital. In particular, social capital through elite education increases the likelihood of regaining a position when the CEO's character is called into question. Alternatively, a strong reputation increases the likelihood of regaining a CEO position when a CEO's character has not been called into question. These findings suggest that dismissed CEOs can regain a CEO position; however, this likelihood is strongly influenced by how others perceive the executive and their concerns about prior behavior.