How do you pump up the value of your company in these difficult times? According to a new study of 1,300 corporate bosses, board directors and analysts, you socially influence the equity analysts.
Authors: James D. Westphal, Melissa E. Graebner
We examine how and when corporate leaders manage stakeholder impressions about board behavior.
Our theory and findings suggest that negative stock analyst appraisals prompt influential corporate leaders to increase externally-visible dimensions of board independence without actually increasing the board’s tendency to control management.
We also consider how relatively negative analyst appraisals may prompt CEOs to engage in verbal impression management in their interpersonal communications with analysts, whereby they attest to their board’s tendency to monitor and control management on behalf of shareholders.
We also find that these increases in formal board independence, in combination with verbal impression management toward analysts, result in more favorable subsequent analyst appraisals of the firm, despite a lack of effect on actual board control.
The Economist reports that chief executives commonly respond to negative appraisals from Wall Street by managing appearances, typically done by hiring directors who, although they may have no business ties to the company, are socially close to its top brass.
According to James Westphal, one of the study’s co-authors, some 45% of the members of nominating committees on the boards of large American firms have “friendship” ties to the boss—though this varies widely from company to company.
The tactic pays off with appreciably higher ratings. At firms that make a strenuous effort to persuade analysts that such board changes have boosted independence, and thus made management more accountable, the likelihood of a subsequent stock upgrade rises by 36%, the study concluded. The chance of a downgrade, meanwhile, falls by 45%.
Why do analysts swallow this self-interested narrative? Respondents acknowledged that social ties could undermine independence, but most said they do not have the time to look into such issues. It would help if companies disclosed such relationships in their standard company literature, suggests Mr Westphal. He thinks they should also list shared appointments—when the boss and a director sit together on another firm’s board.
Depressingly, these market-distorting shenanigans are part of a pattern. An earlier study found that public companies commonly enjoy lasting share-price gains from plans that please analysts, such as share buybacks and long-term incentive schemes for executives, even when they fail to follow through on announcements. Another concluded that the further a firm’s profits fall below consensus forecasts, the more favours its managers bestow on analysts—such as recommending them for jobs and even securing club memberships for them—and the lower the likelihood of a further downgrade. If investors rated analysts, those taken in by such blatant attempts at manipulation would surely earn a “sell”.
“A Matter of Appearances: How Corporate Leaders Manage the Impressions of Financial Analysts about the Conduct of their Boards”, by James Westphal and Melissa Graebner, Academy of Management Journal, February 2010