Status-Anxious CEOs Will Sacrifice Profits for a Knighthood

Picture the platonic, if slightly exaggerated, ideal of a CEO: a focused leader of their subordinates, a relentless pursuer of profit — that is, of course, unless he or she gets distracted along the way. Come to think of it, "sir CEO" has a really nice ring to it, doesn’t it?

In a new paper, researchers Konrad Raff and Linus Siming found that CEOs were willing to let their firm’s performance suffer for the sake of…a knighthood (or a damehood, if she happened to be a woman). Chief executives, it seems, actually forsake cutting costs or firing employees when presented with the possibility of the archaic honor — the award of which might be hurt by, say, a round of ugly layoffs.

Governments, in turn, may be using such awards as a low-cost means of boosting employment in companies run by CEOs that are suckers for status symbols, according to Raff and Siming, who are professors at VU University Amsterdam and Bocconi University, respectively.

The pair examined the performance of companies in New Zealand, where honors like knighthoods were abolished in 2000 and then reinstated in 2009. In the interim years, when knighthoods and damehoods were no longer available, the net profit margins of firms run by native New Zealanders — that is, those who had been eligible for honors – improved by 52 percent. (The research looked at low-competition industries, in which a CEO might have room to keep some fat on the payroll without sending his company into bankruptcy.) At the same time, the companies also saw a decrease in both staff costs and the number of employees, an indication of where those extra profits might be squeezed from.

But when the honors were reinstated, net profit margins fell by 44 percent. "The results indicate that government awards distort CEO incentives to the detriment of shareholders," the authors write.

As for whether politicians are doing this consciously — using knighthoods to encourage the continued employment of dead weight — Raff and Siming aren’t sure. They do note, however, that awards are "less costly than alternative measures" — say, subsidies or regulations.

The bottom line: CEOs aren’t entirely creatures driven by profit. They’re also surprisingly drawn to archaic, wholly symbolic, honors like knighthoods. Who says chivalry is dead?