The Harder the Challenge, The Better the CEO
I came across a research study draft (April 18, 2006) on the Internet titled “CEO Reputation and Earnings Quality” by Jennifer Francis, Allen Huang, Shiva Rajgopal, and Amy Zang. Except for Shiva Rajgopal (University of Washington), the authors are all affiliated with Duke University. Their joint research objective was to determine if CEO reputation was associated with higher or lower quality earnings.
What is fascinating was their finding that CEOs with better reputations (or as they call them “more-reputed CEOs”) are associated with firms with poorer earnings quality. The reason given is that:
“…poorer earnings quality firms require the talents of more-reputed CEOs. That is, the factors that give rise to poor earnings quality are the the same factors that require the superior skills of more-reputed CEOs…boards of directors hire specific managers due to the reputation and expertise these individuals bring to managing the more complex and volatile operating environments of these firms.”
This helps to explain the importance of CEO Capital given that most companies do operate under less than certain conditions. The right CEO is a must for companies looking to recover their equilibrium and manage through change. The research also explains the premium now placed on Renault/Nissan’s CEO Carlos Ghosn and the proposed alliance with GM. As I have said repeatedly in my book, as much as we might not like it, CEO reputation matters in shaping a company’s destiny.