Creating a Performance Incentive System: Can Risk, Distortion, and Manipulation Be Successfully Balanced?

Abstract

try and firm characteristics, that having founder and heir ownership does indeed increase the level of opacity in public companies. But does having more (or less) transparency help or hurt share holders and firm performance (measured, in this study, by Tobin's q?the market value of firm assets divided by the book value of those assets)? As it turned out, Anderson and his colleagues found that in founder- or heir-controlled firms, higher levels of transparency were associated with more positive performance. To further test this relationship, Anderson and colleagues created a subsample of only the most highly visible and transparent firms. Once again, founder and heir ownership was associated with higher levels of performance in these very transparent firms. At the other end of the spectrum, another subsample was created?consisting of the least transparent firms. This time, the results revealed that founder and heir ownership had a negative impact on performance. Put simply, outside investors seemed to value founder- or heir-controlled firms only when a high level of transparency existed. In essence, founder and heir ownership may indeed provide an additional monitoring mechanism over management?but that is only valued when out siders can see what is going on. When the view is cloudy, the behavior of founders and heirs appears to be more suspect and open to question. Next, Anderson and his colleagues examined the impact of three different types of CEO (i.e., is the CEO the founder, an heir, or a professional manager?). Within heir-controlled firms, CEOs were split almost equally between heirs (51%) and professional managers (49%). However, in founder-controlled firms, the founder-as-CEO was dominant (81%), trailed by heir-CEOs (1.9%) and professional manager-CEOs (17%). So how does the type of CEO and level of transparency relate to firm performance? Interestingly, having a founder as CEO neither added much value in transparent firms nor detracted much in more opaque firms. Transparency (or the lack thereof) apparently doesn't have much impact on firm performance when a founder-CEO is in charge. Such was not the case when a professional manager sat in the CEO's chair. Anderson and his colleagues found that having professional manag ers in the CEO role was positively associated with performance in more transparent founder-con trolled and heir-controlled firms. But as firm opac ity increased, having a professional manager as CEO became negatively associated with perfor mance. Overall, when firm transparency was high, having a professional manager as CEO (versus other types) seemed to be the best way to go in terms of performance?regardless of whether the firm was founder or heir controlled. Anderson and his colleagues have cast new light on questions about firm transparency. In deed, their work reveals that despite stringent disclosure requirements for publicly traded com panies, firms nevertheless vary greatly in the de gree of transparency and information dissemina tion they provide. Moreover, their core findings point to a positive link between transparency and performance. That said, the motivation of founders and heirs in less transparent and weaker performing firms remains murky. Anderson and colleagues theorize that founders and heirs use opacity as a cloak to extract firm resources for their private benefit. Regardless, there's no ques tion that the market is skeptical of firms with higher levels of opacity?and the dirty laundry they may be hiding.