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Cover Story
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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
CEO’s Time Use & Governance
Findings indicate that CEOs whose firms have better governance work harder. This is consistent with the interpretation that observed variation in time allocation reflect differences in governance.

We can test this relationship directly, by analysing the correlation between time use and five independent proxies of “governance quality”. These proxies rely on the intuition that the CEO’s ability to pursue activities that only produce private benefits, depends on the strength and effective functioning of the firm board and its ability and willingness to monitor CEO’s actions, as well as on the economic cost the CEO pays if the firm underperforms.

In this framework, we proxy quality of governance using five external firm level indicators. First we use an indicator of whether the firm is a multinational. We would expect that CEOs of multinational firms incur a higher cost if they divert time from productive to unproductive uses. Supporting this idea, we find that CEOs who work for multinationals spend more time with insiders and less time with outsiders alone. In particular, our study proves that CEOs who work for foreign MNCs spend 54% more time with insiders and 55% less with outsiders alone.

The next set of indicators proxies for the power of firm owners vis-à-vis the CEO. The first indicator measures whether the firm is owned by a family, and if so, whether the CEO is external to the family or not. This distinction is key because it raises different governance issues.

We find that external CEOs who work for family firms spend 32% more time with insiders and 27% less time with outsiders alone. This is in line with the intuition that compared to disperse shareholders, family owners can keep a tighter control on their CEOs.

Family CEOs, in contrast, do not appear to behave differently than CEOs in non-family firms. The second indicator is the size of the board. Large boards have long been suspected of being dysfunctional and to provide too little criticism of management performance, thus granting CEOs more discretion which can be abused (e.g. Lipton & Lorsch, 1992).

In line with this, our study shows that CEOs with larger boards spend less time with insiders and more time with outsiders alone. A 1% point increase in board size reduces the time spent with insiders by 0.24% point while it increases time spent with outsiders alone by 0.47% point.

As a third proxy for quality of governance we use an indicator for whether there is at least a woman in the board. We find that CEOs spend 17% more time with insiders and 27% less with outsiders alone, respectively when at least one woman on the board has an executive role.

As a final and more direct measure of governance quality and restraints on the managers we use the country-level indicator of private benefits of control computed by Dyck and Zingales (2004) on the basis of block control transactions in 39 countries. We attach this measure of quality of governance to multinational firms in our sample on the basis of their country of origin and rely on within variation among MNCs.

Our findings indicate that CEOs who work for multinationals based in countries with better governance spend more time with insiders and less with outsiders alone. A one standard deviation increase in the index indicating a worsening of governance decreases hours spent with insiders by 13% and increases hours spent with outsiders alone by 45%.

Taken together, the findings provide a coherent picture. Whenever the CEO and the firm interest are better aligned – either because of stronger market competition, better monitoring, more powerful boards – CEOs spend more time with insiders and less time with outsiders alone.

CEO Time Use & Firm Performance
For our next test we match the time use data with external measures of firm performance. Following the theory, we test whether the time the CEO spends with different categories of people is correlated with firm performance. We estimate the conditional correlation between firm performance and CEOs’ time use controlling for firm size and industry dummies. Our main measure of performance is productivity, measured as the value of sales over employees. Firms in the finance sector are excluded because sales/employees is not a comparable measure of productivity in this sector.

We find a strong positive correlation between hours worked and productivity. A 1% increase in CEOs’ working hours is associated with a 2.14% increase in productivity. This correlation is entirely driven by the hours the CEOs spend with at least one other employee of the firm. A 1% increase in hours spent with at least one insider is associated with a 1.23% increase in productivity. In contrast, hours spent working alone and, most interestingly, hours spent with outsiders alone are not correlated with productivity.

A possible further concern is that the impact of time allocation choices might reveal itself over a longer period. For example, networking activities might need a longer time frame to bear their positive impact on performance. To test this, we consider as a dependent variable the growth rate of sales over a three year period. The results do not support the idea that time spent with outsiders might have a positive long run impact. In fact, although the coefficients are not precisely estimated, time spent with outsiders is negatively correlated with three-year sales growth, while time spent with company insiders shows a positive correlation.

Steven Philip Warner           

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