Is your firm underperforming? Your ceo might be golfing too much

MONEY

A year before Bear Stearns failed during the financial crisis, there were signs that the Wall Street firm was in trouble. During July 2007, two of Bear Stearns’ large hedge funds were failing. What was CEO James Cayne doing at the time? That month, he spent 10 “working” days either playing golf or the card game bridge.

We realized that studying how much time CEOs spend teeing up might help us to understand the efficacy of equity-based incentives and whether they’re being used appropriately. We empirically evaluated incentive compensation, firm performance and evidence of CEOs “shirking” their duties. In other words, do some CEOs consume more leisure, and thus work less, than shareholders would prefer, to the detriment of firm performance and value?

We measured the golfing habits of a subset of CEOs of large firms from 2008 to 2012. We argue that the time spent playing golf is a valid proxy for personal leisure (and inversely effort) because of the time commitment required to play golf and because of the popularity of the sport with executives.

We studied 350 CEOs who maintain a handicap with the United States Golf Association. That means they record the scores and number of rounds that they play. We first looked at how frequently CEOs play golf, to see if there is any reason for concern.

On average, a CEO records 16 rounds of golf per year — a little more than one round per month. We found several CEOs who recorded more than 100 rounds of golf in a single fiscal year — roughly one round every three days!

We next considered the factors that may explain the huge variation in golf frequency across CEOs. Indeed, we found that CEOs’ financial incentives matter. CEOs play less golf when they have more overall wealth invested in their firms.

Next, we turned to firm performance to determine if high levels of leisure consumption are associated with underperformance. Separate tests focusing on operating performance and stock market valuations both suggest that high levels of CEO leisure are associated with underperforming firms.

To understand the relationship between leisure consumption and firm performance better, we implemented an instrumental variable analysis. This helps identify a causal relationship in observational data. Our analysis confirmed this relationship: A shirking CEO causes underperformance and harms shareholder wealth.

These results should put investors and directors on alert, especially considering how hard it is to measure and observe CEO effort. Even with all of the focus on the creation of shareholder value and the powerful incentives associated with the executive suite, it appears that Cayne’s penchant for playing bridge and working on his backswing instead of going to work was not as anomalous as one might have hoped.