Greed is good? Not for shareholders, says a new study of CEO behavior
“The point is ladies and gentlemen that greed, for lack of a better word, is good.” But does Gordon Gekko’s famous line in the 1987 movie Wall Street still ring true today? Not according to a researcher at Texas A&M University, who found that greed, specifically greedy CEOs, are bad for business.
In their study “When More Is Not Enough: Executive Greed and Its Influence on Shareholder Wealth,” Michael Hitt, a Texas A&M management professor at Mays Business School, along with co-authors Katalin Haynes, University of Delaware, and Joanna Campbell, University of Arkansas, assert that CEOs who met their definition of “greedy” had companies with lower shareholder value than companies without greedy CEOs.
Hitt notes it was a challenge to define “greedy,” as what is considered greedy varies from person to person. “The philosopher Adam Smith discussed self-interest suggesting that in order to succeed in a capitalist economy you have to be motivated to pursue your own self-interest,” Hitt explains. “It’s not bad to be self-interested, but greed is something different. We defined greed as the desire for and pursuit of excessive or extraordinary material wealth. It’s not bad to be well-compensated or earn returns, but when it’s beyond that which is reasonable, it is greed.”
The researchers examined just over 400 CEOs during an eight-year period, ensuring a CEO was in the position for at least three years.
In determining CEO greed, the researchers settled on three determining factors: the perks received by a CEO such as private jets and company cars; total pay relative to the next highest paid executive; and other pay predictors such as firm size, i.e. CEOs of larger firms will make more money, and firm performance, so the researchers predicted what CEO pay should be based on these factors.
Once they determined which CEOs were greedy, they looked at the shareholder value of each CEO’s company. “We found that the more greedy the CEO, the less the company was valued,” Hitt notes.
The correlation, Hitt speculates, is likely due to a variety of factors, including a negative effect on a firm’s reputation, employee and shareholder distrust of a greedy CEO, and the fact that these CEOs make poor decisions.
“When a CEO’s behavior is seen as greedy, others may not trust them to make good decisions,” Hitt explains. “They are thinking of themselves over their employees and customers. These people have poor judgment and are not good managers.”
So how can CEOs counteract perceptions of greediness?
“Good works help,” Hitt points out, “such as donating to charity. But also making good judgment calls and giving employees a positive place to work so they believe the company cares about them. It is also important to provide customers with value for their money.”
Hitt says of course not all CEOs are greedy and many have helped their companies earn positive reputations among customers and have built company cultures that make them great places to work. “The CEO has a very important role in establishing and nourishing the culture of a company,” he concludes. “Based on our findings, it seems greed has no place in today’s corporate culture.”
To read the study in full, click here.
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