The Weird Effects of Knightood: More Employment, Less Profits
A visible titular honour has always been regarded as the most appropriate mean of celebrating success at the highest level of one national life. Such kind of non-monetary rewards may now also be considered as an effective way to help reduce jobs cuts, at the expenses of shareholder returns. Indeed, CEOs are less likely to cut jobs if this behaviour is in line with honors such as knighthood and damehood, especially if they operate in non-competitive industries. This is perhaps the most striking result of Knighthoods, Damehoods, and CEO Behaviour, an article by Linus Siming (Department of Finance) and Konrad Raff (VU University Amsterdam).
Interestingly, the impact of government awards and honors for CEOs on firms performances have received little, if any, attention by finance research. However, anecdotal evidence suggests that government awards are highly valued by CEOs. For instance, several years ago the "cash for honors" scandal occurred in UK showed that several business leaders were willing to receive non-monetary honors/awards in exchange for significant contributions to the Labour Party.This may be one of the reasons why the work by Siming received a lot of attention even by international press, such as the Financial Times which recently featured the paper in the front page.
The basic hypothesis of the authors is that the prospect of receiving an award in the future might alter CEO incentives today to cut jobs and boost profits, for fear of drawing the ire of politicians and the public. The study looked at companies in New Zealand, which abolished knighthoods and damehoods in 2000 before reinstating them in 2009. Such elimination and reintroduction of titular honors represents natural experiments to empirically test the model's predictions. The authors find that when CEOs knew there was no chance of getting an honor from the government (during the abolishment period), they cut jobs to improve the firms' profits. On the other hand, when the prospect of receiving such non-monetary rewards was reintroduced after 2009, the same group of firms became less profitable and CEOs were less willing to cut jobs, suggesting that government awards encouraged CEOs to act against the interest of shareholders, and in favor of the interest of stakeholders.
The authors compared firms where the CEO was eligible for a title with groups run by foreign-born executives. Indeed, foreigners were never able to receive titular honors so they were not affected by the two legal reforms in which New Zealand first abolished, and then reintroduces the conferral of knight- and damehoods. The authors find significant changes in firm behavior and economic performance around the two legal reforms. This is especially evident for companies in industries where competition is relatively weak. After the abolishment of titular honors firm performances improves while, conversely, the reintroduction of such non-monetary awards/honors leads to declining economic performances for firms in which CEOs were eligible.
Interestingly, the authors find that the main channel through which economic performance increases after the first reform is a lower staff cost resulting from falling number of employees. This generates a potential tradeoff between profitability and the welfare of the firms' stakeholders. Governments are informed: titular honors might be good for the aggregate welfare, provided firm's shareholders are willing to pay the cost.