Monday, September 13, 2010

Bad CEO leadership causes companies to fail, according to new GSU study

When big companies hit the skids, their leaders often point the finger at something – or someone – other than themselves.

But the reality is bad leadership can push distressed companies over the edge, causing them to fail, while excellent leaders can help lift troubled companies faster from problems such as regulatory scrutiny, according to a new study co-authored by a Georgia State business professor.

“CEOs often play the blame game and say that things are beyond their control,” said Martin Grace, professor and associate director of the Center for Risk Management and Research in the J. Mack Robinson College of Business at Georgia State University.

He added, “But great CEOs are more efficient and when under scrutiny, they can influence a company, lowering the probability of a company failing.”

In the report, “Dupes or Incompetents: An examination of management’s impact on firm distress,” Grace and co-author Tyler Leverty of the University of Iowa, tracked 12,000 insurance companies because that industry is in the business of taking on risk, and distress is relatively frequent and severe, even in good economic times. It’s also a great laboratory because industry CEOs frequently move around.

The study looked at such factors as company performance during financial distress and how well the CEO was able to marshal a firm’s resources efficiently and move it away from regulatory scrutiny or potential failure.

Researchers found excellent CEOs were able to remove their firms from regulatory scrutiny eight to 16 times faster than poor leaders. In insurance companies going out of business, a more talented CEO showed a better return on the firm’s assets by up to 10 cents on the dollar.

The study looked at performance of companies between 1989 and 2000. The majority of the data for the study came from the 1989 to 2000 National Association of Insurance Commissioners Property-Casualty (NAIC) annual statement database. Other data is from the A.M. Best Company’s “Key Rating Guide,” and the U.S. Bureau of Labor Statistics.

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