Whether greed or generosity, leaders’ extremes mean trouble ahead for their companies, according to research by Michael Hitt, Distinguished Research Fellow.
Following the Great Recession, many investors pointed fingers at the millionaires in charge of multibillion-dollar corporations, but were the accusations of avarice on target?
Michael Hitt couldn’t find business research linking greed to the bottom line. Existing studies tend to intertwine greed with hubris. Thus, he launched a study to determine if extravagant salaries of top executives hurt shareholder returns, undertaking a painstaking process to separate greed from arrogant behavior.
“Just because an executive is highly paid doesn’t mean that he or she is greedy,” said Hitt, Distinguished Research Fellow in management, entrepreneurship and leadership. “We defined [greed] as the pursuit of extraordinary wealth.”
Analyzing CEOs who led the wealthiest firms in the U.S. between 1997 and 2006, Hitt scrutinized data from more than 300 publicly traded companies where boards of directors determined executive compensation. He then tied the salaries to the firm’s performance over time to compare compensation to what would be considered standard based on the company’s performance.
Hitt published his research results in the Journal of Management with co-authors Katalin Takacs Haynes at the University of Delaware and Joanna Tochman Campbell at the University of Cincinnati. The results showed that greed does have a negative relationship with shareholder returns, but companies can moderate the effect by reducing managerial discretion, lengthening tenures of top executives and creating stronger boards of directors with more members who are otherwise unaffiliated with the company.
About 70 percent of chief executives chair the board of directors for their companies, Hitt said.
“So if you’re chairman of the board, you also have input on who serves on the board, and you control the agenda to a degree and likely have more influence over subcommittees,” he said. “CEOs in those roles have more discretion to act. Where they had more discretion, we found the existence of more managerial greed.”
Another study contrasted selfish and selfless leaders and found that neither extreme was good for the firm. Greed can result in an emphasis on short-term performance, but Hitt said leaders who take altruism to the extreme could fail to satisfy shareholders, which then might compromise a company’s viability.
Hitt, Haynes and Matthew Josefy at Indiana University published results of the greed-versus-altruism study in the Journal of Leadership & Organizational Studies. Now the researchers are collecting data on the attributes of high-performing and low-performing CEOs to identify factors contributing to, or deterring from, their companies’ success.
“You need people who are confident, who are motivated and who also balance that with altruism, but not to an extreme,” Hitt said. “They want to help others, and they want to see others gain value along with them and their firms. Those are the ones who tend to be the best leaders for the firm, and those firms are likely to have the best long-term performance.”