Greedy managers hurt shareholders

http://www.udel.edu/udaily/2014/jun/greed-061314.html

June 13, 2014

In a forthcoming article in the top-ranked Journal of Management, new research by University of Delaware assistant professor Katalin Takacs Haynes examines the effects of greed on shareholder wealth and looks at whether various contextual factors, like a strong board of directors, CEO tenure and discretion make the situation better or worse.

The findings? Although the pursuit of extreme wealth by top managers can lead to lower performance and loss of shareholder value, a powerful board or long CEO tenure can moderate the relationship between greed and shareholder return.

To come to this conclusion, Haynes worked with co-authors Joanna Tochman Campbell of the University of Cincinnati and Michael A. Hitt of Texas A&M University to conduct an analysis of over 300 publicly traded firms from multiple industries, examining stock market returns and dividends and conducting interviews with a set of top executives and an independent panel of experts — including academic scholars and senior business executives — from a variety of disciplines.

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“Self-interest is OK but eventually it reaches a tipping point,” said Haynes. “When it is taken to the extreme — when it becomes greed — it is detrimental to firm value.”

Haynes added, though, that a key piece of the puzzle is to understand that managers are not uniformly greedy as the popular media can sometimes suggest, rather they differ in their pursuit of material wealth.

“Some CEOs appear to direct more of the firm’s resources toward themselves than others and this can occur more when managers have a lot of discretion or have a short tenure, or if the board is weak,” said Haynes. “Interestingly, we found that the negative effects of executive greed on shareholder wealth decrease as CEOs experience more time in their role.”

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