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What do CEOs do?
Prof. Rafaella Sadun, Professor of Strategy, Harvard Business School, along with Profs. Oriana Bandiera, Andrea Prat of London School of Economics & Prof. Luigi Guiso of European University Institute, write on how CEOs spend their time at work in a research-driven HBS Working Knowledge Paper
Issue Date - 30/04/2012
Time management has been at the core of the research on management for almost fifty years. A key question in organisation economics is whether and how managers allocate their time to maximise firm performance. The theoretical and practical interest, however, are not matched by adequate empirical evidence, as firm datasets typically contain no information on managerial time use, while existing studies of managerial time use are mostly based on very few observations and have not been matched to firm level outcomes.

This paper makes a step towards filling this gap by developing a methodology to systematically collect information on how CEOs allocate their time between different work activities. We develop a time-use diary for CEOs and we use it to record the time allocation of a sample of 94 CEOs belonging to 600 companies Italian and foreign companies in various industries over a pre-selected work week. A minimalistic model of managerial use of time guides our interpretation of observed differences in time allocation patterns, and how these are related to the firmsí priorities and to differences between the firmsí and the CEOsí interests. To operationalize the concept of time allocation, we group activities according to whether they involve employees of the firm (insiders) or only people external to the firm (outsiders). The insider/outsider classification is ideal for our purposes for two reasons. First, it captures the essence of the CEOís job. Second, it is a dimension over which the CEOís and the firmís interests might be misaligned. As a matter of fact, the optimal inside/outside balance is the subject of controversy in the management, finance and economics literature. At one end of the spectrum, a widely held view is that since the CEO is the ďpublic faceĒ of the company, spending time outside the firm is an important (if perhaps not the most important) role of the CEO. At the other end, however, an increasingly popular view points out that time spent with outsiders might mostly benefit the CEO without contributing to creating value for the firm. Khurana (2002), argues that CEOs have strong incentives to seek visibility, by cultivating personal connections with influential business leaders. In line with this, Malmendier and Tate (2009) show that when their power vis-a-vis the firm increases, CEOs spend more time outside the firm in activities (writing books and playing golf), and that this shift in activities does not contribute to firmís performance.

Our data reveal that, as expected, CEOs spend the majority of their time with other people (85%). Of these most are employees of the same firm, but many are not. On average, CEOs spend 42% of their time with insiders only, 25% with both insiders and outsiders and 16% with outsiders alone. More interestingly, these averages hide a great deal of heterogeneity, both in terms of number of hours worked and time allocation. A majority of CEOs spend very little time (less than 5 hours per week) alone with outsiders, but over 10% of them spend over 10 hours a week. Our empirical analysis is aimed at making sense of the wide heterogeneity on this dimension of time allocation choices. We develop a minimalistic model of managerial time allocation that allows us to distinguish productive activities from activities that mostly confer private benefits to the CEO. We use this framework to shed light on whether time with insiders and outsiders can be interpreted along these lines. In our model, the CEO chooses how much time to devote to a number of possible work-related activities, or to leisure. Each of the work activities yield non-negative benefits to the firm and to the CEO. For instance, networking with clients might increase the firmís sale but also increase the chance that the CEO is offered a better job in the future. Suppose activities can be roughly divided into the ones that benefit mostly the firm and those that benefit mostly the CEO. In this set-up, the interpretation of differences in time allocation between these two sets of activities depends on the extent to which the CEOís and the firmís interests are aligned. When these are perfectly aligned, time allocation is entirely determined by the firmís objectives. However, when the CEOís and the firmís interests are not perfectly aligned, time allocation is determined by both the firmís objectives and the CEOís objectives. If the observed variation reflects differences in governance, the model makes precise that the following three sets of correlations must hold:
1. CEOs who work longer hours, devote more time to activities that mostly benefit the firm and less time to activities that mostly yield private benefits.
2. CEOs who work for firms with stronger governance devote more time to activities that mostly benefit the firm and less time to activities that mostly yield private benefits.
3. Time devoted to activities that mostly benefit the firm is more strongly correlated with productivity than time devoted to activities that mostly yield private benefits.

We estimated the correlation between the CEOsí time use, their total time at work, firm level measures of governance and productivity, conditional on the size of the firm, whether it is listed and the industry it is in. The analysis yields three key findings, corresponding to results 1-3 above.

First, the insider/outsider allocation is associated with systematic differences in CEO worktime. In particular, CEOs who work longer hours spend more time with insiders and less time, in absolute terms, with outsiders, especially in on one-on-one meetings.

Second, the insider/outsider allocation is systematically correlated with differences in firm governance.


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