At the Gupta Governance Institute 15th Annual Corporate Governance Conference held on April 8, 2022, a study showed that U.S. public firms whose Chief Executive Officer (CEO) works remotely have weaker operating performance, lower firm valuation, and lower approval rate of the CEO’s policies. The authors won the conference’s best paper award which was sponsored by Wharton Research Data Services.
- Remote working arrangements between CEOs and U.S. public firms are associated with a Return on Assets (ROA) that is 1 percentage point lower than when the same firm is run by a locally-based CEO. Moreover, the market valuation of a firm is 4.9% lower than the mean when it is managed by a long-distance CEO.
- Insights from 1.5 million CEO reviews by firm insiders reveal that the approval rate of the average long-distance CEO is 3.8 percentage points lower than that of other CEOs at the same firm. The three most common concerns are: Remote CEOs have a short-term focus in financial decisions; they are disconnected from the firms’ daily operations; and they are enjoying excessive leisure time. The study finds empirical evidence supporting these concerns.
- Firms learn from experience. In fact, long-distance CEOs are more likely than other CEOs to be ousted by the board or resign under investor pressure. On average, long-distance CEOs stay in their role for 1.85 years less than other CEOs at the same firm, and their departure generates positive announcement returns. Finally, firms that previously employed long-distance CEOs are less likely to agree to CEO remote working arrangements in the future.
Summary of Complete Findings
The remuneration package for executives is an important governance tool as it can create powerful incentives for management to act in ways that boost the value of the company. Executive compensation comprises both monetary and non-monetary contractual arrangements. This research assesses firm performance when CEOs have remote working arrangements and provides evidence of the economic consequences of long-distance relationships between CEOs and firms.
A recent trend in corporate management has seen a dramatic rise in remote work. According to the 2020 Gartner survey of top executives, 74% planned to increase remote work and 90% expected minimal disruptions while working off-site. Technology has made it easier to work remotely and this practice was catalysed by the 2020 global pandemic. The pressing question is whether remote management can be adopted by firms as an efficient long-term strategy.
The authors of this study constructed a sample of over 900 long-distance CEOs using corporate disclosures in public companies with headquarters in the U.S. between 2000 and 2019. Information from Execucomp, BoardEx, Compustat, Google maps, Lexis Nexis Public Records, Glassdoor, Inc., corporate press releases, voter registration records, deed transfer records, and tax assessment records was used to create an extremely comprehensive database.
For a CEO to be defined as “long-distance”, the study requires that (a) the roundtrip commute between the CEO’s primary residence and the firm’s headquarters exceeds 100 miles; and (b) the long-distance working arrangement between the CEO and the firm lasts for at least 12 months.
During the 2000-2019 period, 17.6% of firms maintained a long-distance arrangement with their CEO. The long-distance CEOs are similar to their local counterparts along attributes such as age, gender, business education, and role as chair. The primary difference between the two groups is that long-distance CEOs remain in their role for 1.85 years less than local CEOs. Long-distance CEOs reside in counties with warmer climates, lower tax rates, and better schools. CEOs are also more likely to opt for remote working if it allows them to avoid uprooting their spouses from their home states.
The study first analyses almost 1.5 million reviews of the CEO’s performance by insiders, including mid-level managers, plant supervisors, and rank-and-file employees at the same firm. It finds that remote CEOs have a 3.8 percentage point lower approval rating than other CEOs at the same firm. Relative to the average approval rate of 71%, this differential amounts to a 5.4% difference.
Three common concerns explain the lower approval rates. First, employees suggest that long-distance CEOs have a short-term focus and are not committed to the firm in the long-run. Second, insiders reveal that long-distance CEOs are less informed about the firm’s daily operations. Third, employees are uneasy about CEO absenteeism and worry that CEOs’ leisure activities distract them from solving the firms’ issues.
These concerns are supported by empirical findings. Specifically, CEOs’ short-termism is confirmed by the observation that long-distance CEOs are associated with a decline in the rates of R&D investment and capital expenditures by 23 and 16 basis points respectively (equivalent to 5.2% and 3.8% of their corresponding means). Moreover, capital investment in property, plant, and equipment shifts toward assets with a shorter useful life under long-distance CEOs.
The CEO’s inadequate understanding of the firm’s operations is supported by the observation that the decline in the firm’s operating performance (ROA) during remote working arrangements is twice as strong for externally-hired CEOs, for whom on-site presence is more important for learning about the firm than for their internally-promoted counterparts. The decline in ROA is reduced when information is less concentrated at the firm’s headquarters (e.g. for geographically-dispersed retail firms) and when the remote CEO can access the firm’s regional office near their primary residence.
Finally, the criticism of excessive leisure consumption is supported by the finding that the decline in ROA is larger for remote CEOs who own recreational boats, maintain their primary residence at a beach home, and/or live within 10 miles of a premium golf course.
One of the main conclusions of this research is that a firm’s ROA declines by 1 percentage point when its CEO works remotely. This drop in operating performance is independent of the inherent qualities of the CEO, and it is 50% more severe for CEOs whose commuting distance to the headquarters exceeds the sample median of 776 miles. The negative effect of remote CEO arrangements on ROA is larger for CEOs who live in a different time zone than the firm’s headquarters, and it is 38% greater when the CEO also serves as the chair of the board.
The study further considers the impact of a long-distance CEO on the firm’s market valuation, as measured by the Tobin’s Q (i.e. the market value of a firm’s assets divided by their book value). It finds that a firm experiences a 0.096 decline in Tobin’s Q after the CEO switches to remote work. This drop is equivalent to 4.9% of the mean of the Tobin’s Q (1.95) in the sample firms.
Not surprisingly, remote CEO arrangements do not last as long. Long-distance CEOs are more likely to leave the firm, resulting in a 15.7% reduction in their tenure. The termination of the contract with a remote CEO is about 6.5 percentage points more likely to be forced by the firm’s board or its investors compared to a traditional CEO. After working with a long-distance CEO, a firm also becomes less likely to enter into remote CEO arrangements in the future.
The departure of a long-distance CEO is associated with a 2.6% increase in the firm’s market value. This is a significant result especially considering that, in contrast, the departures of regular CEOs are met with near-zero announcement returns.
In conclusion, this study provides significant food for thought in the era of remote working by showing that such arrangements between a firm and its CEO can be associated with worse outcomes for the firm.