The Superstar CEO Curse

Why publicly praised executives tend to underperform.

There may be an executive suite parallel to the saying that when an athlete is featured on the cover of Sports Illustrated, he or she is doomed for a slump. When BusinessWeek and Forbes name their lists of “Best Managers” or “Best Performing CEOs,” the intention is to highlight CEOs whose successes suggest they have an innate ability that puts them a step ahead of other managers. To put that to the test, Ulrike Malmendier, assistant professor of economics of the University of California, Berkeley, and Geoffrey Alan Tate, assistant professor of finance at UCLA’s Anderson School of Management, compiled a list of over 250 CEOs who won awards from any of 10 different sources, going back as far as 1975, to capture those who won more than one award in their careers. They then examined the performance of the CEOs’ companies after awards were granted between 1993 and 2002.

The researchers’ March 2007 working paper, Superstar CEOs, concludes that award winners’ companies underperformed the broader market, both in terms of stock returns and returns on assets, over the one-, two- and three-year periods following the award. But the CEOs themselves did just fine: Award winners tended to receive higher compensation, mostly equity based, than other CEOs.

The authors go on to demonstrate that the underperformance is more than just a simple reversion to the mean. They identified a peer group of CEOs who had similar characteristics and performance to the award winners — in terms of company size, book-to-market and returns over the year leading up to an award — but who had not won awards. If the post-award underperformance represented a reversion to the mean, then these unheralded CEOs, who were similar to the award winners but didn’t win, should also revert to the mean.

After examining the data, Malmendier and Tate discovered that the unheralded CEOs’ companies indeed underperformed — but to a much smaller degree than the award winners’ companies. The stock market returns of award-winning CEOs’ companies lagged those of their unheralded peers by about 4% per year over the three years following an award.

All this suggests that glowing profiles have a real effect on CEOs. One explanation is that award-winning leaders could be distracted by an increasingly crowded plate of outside interests, including writing books and sitting on boards.

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