While greedy company leaders can be detrimental to a business, there are ways to diminish their negative effects, new research finds.
Although the pursuit of extreme wealth by top managers can lead to lower performance and loss of shareholder value, a powerful board of directors or long CEO tenure can moderate the relationship between greed and shareholder return, according to a study to be published in the Journal of Management.
Katalin Takacs Haynes, one of the study's authors and a University of Delaware assistant professor, said self-interest is OK, but eventually it reaches a tipping point.
"When it is taken to the extreme — when it becomes greed — it is detrimental to firm value," Haynes said in a statement.
Haynes said, however, that it's important to note that managers are not uniformly greedy. She said company leaders differ in their pursuit of material wealth.
"Some CEOs appear to direct more of the firm's resources toward themselves than others and this can occur more when managers have a lot of discretion or have a short tenure, or if the board is weak," Haynes said. "Interestingly, we found that the negative effects of executive greed on shareholder wealth decrease as CEOs experience more time in their role."
The study's authors came to their conclusions after conducting an analysis of more than 300 publicly traded firms from multiple industries, examining stock market returns and dividends. They also interviewed a set of top executives and an independent panel of experts — including academic scholars and senior business executives — from a variety of disciplines.
One of the key aspects of their research was coming up with a definition of greed, as it related to CEOs. The definition of greed the researchers arrived at was the desire for and pursuit of extraordinary wealth.
"There was a unanimous opinion of our interviewees that wealth didn't need to be realized for greed to exist, and that high level of wealth was not the same as greed," Haynes said. "It's the desire for and active pursuit of extraordinary wealth that is associated with greed."
Haynes added that while employees at all organizational levels may have the desire for extraordinary wealth, they may not be in a position to pursue it, while top-level executives are more likely in a position to pursue and even realize wealth.
The study was co-authored by Joanna Tochman Campbell of the University of Cincinnati and Michael A. Hitt of Texas A&M University.
Originally published on Business News Daily