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Did your CEO just win an award? Start worrying…

“Team titles might be what matter to them most, but football fans are also generally pleased if a player in their team wins an award. Publishers rarely object when their authors win Booker or Nobel prizes for literature. So how should shareholders in a company feel when the company’s chief executive wins an accolade such as “Best Manager” from Business Week or “Best Performing CEO” from Forbes? New research from two California-based economists suggests that the correct response would be to feel sick.”

Tim Harford, Financial Times (25 April 2009)

Tim Harford, the famous author of The Undercover Economist, is alerting you to something startling here: if your CEO wins an award, you should be getting very, very worried…

Why so? Harford is quoting two California professors, Ulrike Malmendier and Geoffrey Tate. Their recent study in this subject found that award-winning CEOs are paid more and deliver less following their awards! Part of this is explained by plain luck. Success as a CEO is as much about luck as it is about talent. Even the most highly regarded CEOs would be willing to admit that uncomfortable little fact in private. So, to receive an award based on recent results, you have to have been enjoying a lucky streak. Luck, however, eventually runs out – and often starts doing so just after the award is announced.

A second reason is about power. When the CEO is a publicly applauded ‘rock star’, there is a definite shift in the balance of power. Shareholders and directors have to start playing second fiddle to the hero, and will often find themselves giving out larger pay awards and perks than would strictly be necessary – simply out of fear of losing the star to whom the destiny of the company seems tied. They also give away power: the star CEO stops getting any meaningful challenge from non-executive directors and shareholders. A decline in performance is the usual result.

Lastly, the paradox of poor performance coming after an award is about something very simple: focus. The lauded CEO tends to become a public figure much in demand. He will be called to international conferences, will be roped into all sorts of positions in important committees, and will join a few outside boards. His opinion will be sought on everything. He will be press-ganged onto task forces and talk a lot on TV. He may even take time off to write a self-congratulatory autobiography. The time he spends at his own company, focused on his own organisation’s mission, will naturally diminish.

And of course, armed with more pay and more power, the CEO may start relaxing a little, perhaps spending more time on the golf course. You don’t believe me? The California study found that award-winning CEOs have superior golf handicaps! Golf enthusiasts will, of course, argue that the causation is the other way round: that good golfers make good leaders. The evidence suggests, however, that excellent handicaps are the result of hours of dedicated practice, not innate talent. A close look at the two of the game’s all-time greats, Tiger Woods and Sam Snead, would confirm this. So if your chief executive is a scratch golfer, he’s finding the time somehow…

In closing, never have I written a Thought Leadership column with my tongue so enjoyably in my cheek! My many CEO friends, who might be reading this at the club bar after a quick 18 holes, should resist the temptation to down an extra tot in umbrage. Real leadership has never been about fickle awards and false flattery. It is about consistently applied values and continuous improvement – just like your golf game!

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