Study: Don’t let poor performing executives play the blame game

AUBURN – Media attention often focuses on success enjoyed across the board in certain industries, such as oil firms, and the woes of others, such as airlines. However, an Auburn University professor has helped demonstrate that industry membership matters little for success.

Using data from more than 1,000 firms, a study in the February issue of the Strategic Management Journal finds that less than 1.5 percent of the changes in firms’ stock market performance is explained by industry membership. It is even less of a factor in regard to likelihood of bankruptcy.

In both situations, the differences among firms such as their resources and leadership account for more than 90 percent of the variability.

“These findings make it clear that stockholders should not accept difficult industry conditions as an excuse for poor performance,” said Dave Ketchen, study co-author and Lowder Eminent Scholar at Auburn University.

“A firm’s fate is almost entirely driven by executives’ decisions. Executives should not be allowed to play the blame game when the firm struggles. They need to be held accountable through pay cuts or, in some cases, dismissal.”

The study’s results should encourage boards of directors to follow Home Depot’s recent example, according to Ketchen.

“Home Depot’s former CEO was taking home tens of millions of dollars a year even though the firm’s stock performed poorly. Stockholders were upset, and they should have been,” Ketchen said.

“Their new CEO is guaranteed less than a million dollars a year, but he has stock incentives that will raise his compensation dramatically if the company does well. This is exactly the kind of alignment between pay and performance that our results encourage.”

The study used a technique called variance decomposition to analyze performance data on 1,165 firms across seven years. Co-authors on the study were Jeremy Short of Texas Tech University, Timothy Palmer of Western Michigan University, and Tomas Hult of Michigan State University.

(Contributed by Dina Kanellos.)

Contact: Dina Kanellos, (334) 844-2203 (kaneldi@auburn.edu), or
Mike Clardy, (334) 844-9999 (clardch@auburn.edu)