Shirking CEOs

Anytime you hire someone there is always a risk that they will not complete their task with the level of diligence that you had anticipated. Unless you monitor the hired party at all times, which can be extremely inefficient, they always have the temptation to “shirk” their responsibilities and avoid the hard work required to do an excellent job. In our paper, FORE! An Analysis of CEO Shirking, which was recently made publicly available on SSRN, we provide evidence that some CEOs of public companies in the U.S. succumb to the same temptation to shirk their duties to shareholders by choosing leisure consumption over the hard work required to maximize firm values.

We conduct this research by analyzing the golfing habits of a subset of S&P 1500 CEOs. We argue that time spent on the golf course is a valid proxy for leisure both because a plurality of executives list golf as their preferred outlet for leisure and because golf commands a significant time commitment. We begin our analysis by testing the relation between CEO incentives and effort. We find strong evidence that CEOs play fewer rounds of golf when they have higher stock ownership and when their own personal wealth is tied more closely to firm performance. CEOs also play more golf as their tenure increases, which is consistent with entrenched CEOs consuming larger amounts of leisure. Alternatively, golf play is attenuated in firms with higher amounts of leverage, which may serve as another mechanism aligning manager and shareholder interests.

We next consider whether high levels of CEO golf represent shirking. We find that the highest levels of leisure are associated with lower operating performance. In years where the CEO played 22 or more rounds, which corresponds to the top quartile of observations, the mean return on assets (ROA) is more than 100 basis points lower than the ROA of firms where the CEO played less frequently. Multiple supplementary tests support a conclusion that the lack of CEO effort actually leads to lower firm performance. The strongest evidence of causation is provided by an instrumental variable analysis which shows that this result continues to hold when only evaluating the amount of golf CEOs play that can be explained by the quality of the weather where their firms are headquartered. Additional tests show that year-over-year changes in golf frequency are negatively correlated with changes in firm profitability, and that the relation between CEO leisure and firm performance is concentrated in fast growing industries where CEO effort may be more important. We go on to show that CEO shirking affects shareholder wealth. CEOs in the top golfing quartile are associated with firm values (measured by Tobin’s Q) that are almost 10% lower than otherwise similar firms.

Lastly, we consider the extent to which directors are able to discipline shirking CEOs. For new CEOs, the threat of discipline appears somewhat effective, as high levels of golf are less likely to persist. Alternatively, the threat of board discipline appears to have little impact on long tenured CEOs as they are more likely to be frequent golfers and the behavior is persistent over time, which is consistent with entrenchment. In general, the association between higher golf play and CEO turnover appears most acute in firms with more independent boards and for CEOs who are earlier in their tenure.

Overall, our analyses support a conclusion that a significant fraction of public company CEOs do not work as hard as they could to maximize returns to shareholders, and that the costs of their leisure consumption to shareholders is substantial.

The full paper is available for download here.