David Cicero- Fore! An Analysis of Executive Shirking

David Cicero- Fore! An Analysis of Executive Shirking


OK, thank you so much. I’m David Cicero, I’m from
the College of Business and I just want to start by saying I have an incredible amount of respect for all of the impactful
research that you guys are doing in your
departments all around campus and that’s coming out of the
great research universities all around the world really, right? So, I’m in the Business School, and so then the research
that we like to do is seeing how the wonderful,
important innovations that are being done elsewhere, how those can be brought to the market, how we most effectively and
efficiently bring things to the world, to make
the world a better place. So, I’m in the Finance Department
and my area of expertise in particular is corporate finance. And corporate finance is
really a social science, right? It’s really about the organizations and the individuals, the humans that are doing this
function in society, OK? So we like to study, how do
we best organize ourselves, or how do we best treat
humans, how do we best incentivize them to do their best to make the world a better place with all these great advancements, OK? And I just want to talk to
you about one project today that I’ve worked on recently, that kind of gets at one of these questions, one of these core fundamental questions in financial economics,
but kind of does it in a little bit of a fun way. So if you look at our title
here, I’ve titled this Fore! An Analysis of Executive Shirking. And so there may be two words there that you’re not familiar
with in the title, the first one being fore,
well what does that mean? Well that’s actually a
word from the game of golf, which kind of clues you in to our unit of measurement here in this study. So in golf, if you hit an errant shot and put other people in danger, if you do something wrong, you yell fore, and that warns the world that you’ve done something wrong and that
they’re in danger, OK? And then shirking. So shirking, just going
to Merriam Webster, we think of shirking as
to do something stealthily or sneakily and to try to avoid your performance of an obligation, right? To shirk one’s duty means to try to get out of it to goof off instead, right? And so in this question
we look at the issue of whether executives
sometimes shirk their duties. Do they not always do what
we would like for them to do in the best interests of
shareholders and then society. OK, so executives, we
look at public companies, large public companies in the U.S. These are high profile, powerful,
Type A personality people. Is there any reason we’d expect
them not to do their job? Well, here’s an anecdote,
financial crisis, you may remember stories
about Bear Stearns. Bear Stearns was one
of our investment banks that had been around over 100 years, created an incredible amount of value in the U.S. and around the world. Well when they got into a crisis in 2007, one of the big crises that
set off the financial crisis, their CEO, James Cayne,
during that crisis period, turns out later they found out he was either on the golf
course or playing bridge half of the working
days during that month. This was all in the
news and people started scratching their heads
thinking, is he doing his job? Was that the best use of his time? Maybe not, but that’s just anecdotal. But this is a question that people have thought about for a long time. So this is our most prestigious economist, this is Adam Smith who
lived back in the 1700s. And he wrote a book called
The Wealth of Nations and basically since that
time we’ve all just been proving things that he wrote back then. Well he said this, he said
the directors of companies, being the managers of
other people’s money, it can’t be expected that
they should watch over it with the same vigilance
with which the partners in a private co-partnery
would watch over their own. Negligence and profusion, therefore, must always prevail, OK? And this is the type of behavior that you might see in a public company, because in the modern
world the way we organize our businesses is you have
shareholders, you and I, who may own small pieces of a company, we’re the owners, but then we have CEOs and CFOs and executives who
we hire to manage those. Should we expect them to
manage those companies and to show the same level of diligence that we would, if we
were fully in control? That’s the question he
posited years and years ago. Additional anecdotal
evidence, even from back then, that maybe this was a problem and maybe we’re measuring the right thing when we look at golf,
actually I found this, that in the 15th century
King James the Second had to outlaw golf in
order to encourage men to practice, do their archery practice. So it looks like there was clear evidence that it was a problem back then, that people were playing golf instead of taking care of their business. OK, so maybe we’ve keyed into the right tool for measurement. Here are additional fun facts. So this is the UK and there’s Scotland and right up here, does
anyone know what this is? No because you guys are
researchers, you work hard. This is St. Andrews
where golf was invented, the famous bridge there,
and right down the road just a short, whoops, short
drive down to Kirkcaldy, this is where Adam Smith
actually lived and did his work. So maybe he was actually motivated by this observation of people playing golf when he originally hypothesized this. OK, so come now to the modern time. The way that we talk
about these issues today is we think that we craft sophisticated mathematical models and we think that if we give appropriate
financial incentives to executives they’ll work harder, if they work harder we’ll
have better outcomes, OK? Those are agency models, this is what we want to try to test. Now a problem that we
have though is that, yes, outside shareholders want
to incentivize executives and so they give them stock options, they give them holdings
of stock in their company, they want to incentivize
them in order to not shirk. But the problem is if executives do shirk you’re not going to do it in a way that tips off the world that
you’re doing it, right? So it’s been very difficult for people to actually test this
theory and bring data to the question because it’s
hard to observe executives doing their shirking, they’re careful not to get caught and look bad. OK, so that’s where we come in and we’ve gotten this
measure that we think helps us answer this question in a way people have not been able to before. And what we have is, for those executives who play golf, if they’re serious, so they maintain a handicap, they record all of the rounds that they play. And our really clever Ph.D. student was able to, not hack into the system, that’d be a very bad word this week, but he was able to collect data that told us how many times they played golf from 2008 to 2012. And this is the distribution of how often CEOs play golf in a given year, and what you see is a lot
of CEOs play a little golf. And there’s an old adage in business that business gets done
on the golf course, so it might make sense
that you’d expect them to create value by doing this, but you see this tail,
you see this tail out here of some people that are playing a lot. And you have to scratch
your head and wonder if that’s best for shareholders, OK? And so that’s the group we focused in on. And we’re concerned that maybe there’s a subset out there in
the world, even today, with our sophisticated markets, that’s not doing the right thing, not effectively running their companies. OK, so I’m going to show you
just a couple of numbers. We’re analyzing data here, but basically we find evidence supporting
both of these hypotheses, that incentives matter for
how much leisure you consume, therefore how much effort
you’re putting forth, and then the amount of
effort you’re putting forth matters for how well your firm does. So the first test,
whoops, skipped over it, we basically just sort this sample here into those that play a lot of golf, and those that play a little golf. These are the ones playing a lot of golf and these are measures
of their incentives, their financial incentives, their wealth to performance sensitivity and their ownership of their companies. And you see that those
are significantly lower in the group where they
play a lot of golf. And we do some more sophisticated
analyses to back that up. And then we go to the
question of firm performance. And so we run regressions
and we’re trying to explain return on assets, that’s
your accounting performance of your company, is it related, correlated with the amount of golf you play? We run regressions and I’ll just draw your attention to this one over here. Basically, if you identify that group, that top quartile that’s high golfers, you find that it has a very significant negative relationship to firm performance. That translates into 20
percent lower performance for those CEOs in that top quartile, OK? So this is kind of fun research because we’re looking at golf, but right here it just got serious, right? That means all of these, all
of this impactful research that should be changing the world? 20 percent lower impact potentially, amongst those firms where we seem like we don’t quite have it right. Even in this day and age we haven’t fully solved these problems
in the marketplace, OK? Now we do a bunch of other analyses and I’ll draw your
attention to the fact that it looks like there are responses, right? When we do see this kind of behavior boards are more likely to fire those CEOs, but only in certain circumstances. If the CEO’s been there a long time, if the board looks like it’s
a bunch of the CEO’s friends, they’re much more likely
to play a lot of golf and persist in that position
without getting fired, even though they underperform. OK, so this is a red flag, it looks like a place where we could get better in the way that we organize our economy. OK, and so that’s it, just to conclude. And we also look at CFOs and we find that when CFOs, chief financial
officers play more golf it looks like the numbers
they report out to the world, to analysts and investors, they’re poorer, they make more mistakes,
they don’t translate into the actual performance as well, so that hurts our ability
to evaluate the companies. So it looks like it’s a problem
across the entire C suite, and this is debt top executives, and this is data from
within the last 10 years. So this suggests that, you know, this is an ongoing
problem, it’s not something that disappeared back there
with King James the Second. OK, thank you, my time is just out. (applause)

Leave a Reply

Your email address will not be published. Required fields are marked *