Admitting to a mistake or taking accountability for a business’s poor performance is not a favourable position for any CEO.
While this may be viewed as a sign of weakness, it could have the unexpected consequence of boosting a company’s value, according to a new study from the University of British Columbia (UBC).
More than 35,000 CEO conference calls to investors were analyzed as part of the study. These calls spanned 12 years, from 2002 to 2013.
The study focused on whether leaders attributed company and quarterly performance to outside factors such as economic shifts and supply issues or if they attributed performance to internal factors like leadership and decision making.
If a company performed poorly and a leader attributed this to internal factors, a company’s analyst forecast is higher than if this performance were attributed to external factors.
“When the performance was unfavourable and CEOs pointed to internal factors – things they were responsible for, they scored higher in integrity — and that higher integrity in turn yielded higher financial forecasts,” said UBC Sauderprofessor Daniel Skarlicki.
On the other hand, when a company performed well, the way that CEOs explained this performance did not have a significant impact on analyst forecasts.
“We found that CEO accounts didn’t matter a whole lot when the company performed favourably,” said Skarlicki, who co-authored the report with UBC Sauder associate professor Kin Lo, Rafael Rogo from the University of Cambridge and Bruce Avolio and CodieAnn DeHaas from the University of Washington.
Not only are the findings of the study applicable to business cases but can be used in sports or politics. The way leaders explain wins and losses can have an impact on the way that the public perceives them, according to the study.
“Leaders avoid being accountable for failures because they feel like it’s a risk or a potential danger. But observers actually view leaders who are truthful, accountable and transparent more favourably,” said Skarlicki. “We were also excited that we could actually quantify the financial payoff of integrity, and the bottom line is that accountability matters. Deflecting responsibility can be a bad strategy.”
In addition to studying real calls between CEOs and investors, the study created financial earning call scripts and distributed them to 300 financial analysts. These analysts were asked to share their perceptions on the CEO and provide a forecast.
The forecasts and perceptions mirrored the results from the initial phase of the study.
Skarlicki attributes the phenomenon of receiving positive valuations when taking accountability to the “actor-observer bias,” the report said.
“When a business does well, the CEO tends to credit internal forces, but outside observers are more likely to attribute the success to external factors. Similarly, when things go wrong, the CEO often points to outside forces, while outsiders scrutinize the CEO. When a CEO admits their mistakes, it can make them seem more trustworthy which can benefit the company,” the study said.
In 2014, Microsoft Corp. acquired Nokia Corp.’s mobile phone division for over $7 billion to compete with Apple Inc. and Google. The deal ended up being a failure with Microsoft Corp. CEO Satya Nadella taking action.
“Nadella took immediate responsibility and initiated a massive restructuring with a focus on cloud computing and productivity software. Their stock price ultimately soared,” said the study.