Recent findings from a scholarly pursuit undertaken at the University of British Columbia have shed light on the significant impact a CEO’s accountability can have on the value of their company. The study, termed “The Role of CEO Accounts and Perceived Integrity in Analysts’ Forecasts,” embarked on a comprehensive examination of data mined from 35,000 interactions during CEO conference calls with investors.
This historical data, spanning an insightful 12-year period from 2002 to 2013, sought to discern whether the companies observed performed favourably or otherwise. The scrutinising gaze of the researchers was ingrained in how the CEOs articulated their companies’ quarter earnings performances, drawing conclusions to internal parameters like leadership or external circumstances such as global geopolitical unrest, supply chain disruptions, or shifts in economic position.
The enlightening data revealed that in instances when a company’s performance was subpar and the CEO claimed accountability, the ensuing forecasts from analysts were conspicuously higher, in stark contrast to instances where explications of poor performance were deflected to external circumstances. However, when companies performed admirably, the CEOs’ reasoning for success bore minimal effect on the analysts’ future predictions.
In a quest for deeper understanding, the researchers engineered a further experiment, delivering make-belief earnings call transcripts to a group of 300 financial analysts. The scripts were carefully developed, featuring instances where CEOs either faulted external influences for bad outcomes or embraced responsibility for the underperformance. Subsequently, the analysts were tasked to evaluate the CEOs’ aptitude and give forecasts.
Indubitably, the accounts of CEO bore little significance when the company was riding a favourable tide, recounted Professor Daniel Skarlicki from UBC. However, Skarlicki highlights, when the tide was unfavourable and CEOs braved the storm, attributing it to internal factors under their purview, it reflected positively on their perceived integrity which subsequently echoed positively in financial forecasts.
Analysts’ preference for leadership that assumes blame for downturns, as hinted by Skarlicki, can be related to a psychological bias known as the “actor-observer bias.” Skarlicki illustrates this theory through the saga of Microsoft CEO, Satya Nadella. In a failed bid to usher Microsoft into the mobile space through the acquisition of Nokia’s mobile phone division in 2014, Nadella demonstrated accountability by promptly acknowledging the misstep and expedited a strategic overhaul towards cloud computing and productivity software which eventually saw a surge in Microsoft’s stock price.
The study summarises that although CEOs tend to lean on internal elements in the event of success and external in failure, outsiders often interpret the narrative differently. When CEOs exhibit personal accountability for their actions, it inspires an aura of trustworthiness that creates measurable benefits for the company.