Insurance Experts' Forum, September 3, 2010
Quantifying the value of top leadership to a given company is not an easy undertaking. While most would agree that, say, the decisions made by Steve Jobs have buoyed the bottom line of Apple, good luck putting an exact number on his contribution, much less extrapolating his success as a yard stick to judge the performance other chief executives.
If Jobs, tapped last year by Fortune as “CEO of the Decade,” exemplifies what a good chief executive can do to a firm’s fortunes, former Lehman Bros. CEO Richard Fuld may well exemplify the opposite. Testifying before a Congressional panel this week, Fuld sought to minimize his culpability in his company’s infamous implosion and instead pinned the blame on Federal regulators.
“I believed then, and still do now, that had the Fed opened the financing window to investment banks just before the Bear Stearns problem, that decision might have provided the necessary liquidity to keep Bear Stearns operational and, more importantly, might have lessened the need for additional government intervention,” Fuld said, apparently unaware that this seems akin to berating firefighters for failing to prevent your self-immolation.
Since the performances of Jobs and Fuld are certainly atypical, and the insurance industry highly regulated, the more salient question is what does your average insurance CEO bring to the party.
To find out, J. Tyler Leverty, an assistant professor in the Department of Finance at Henry Tippie College of Business, University of Iowa, and Martin Grace, James Kemper Professor, Department of Risk Management & Insurance, Georgia State, dug deep.
In their paper, “Dupes or Incompetents? An Examination of Management’s Impact on Firm Distress,” Leverty and Grace focused their analysis on the property-liability insurance industry. Using a decade’s worth of data from the National Association of Insurance Commissioners (NAIC) Annual Statement database, and some insanely arcane mathematics, they were able to quantify the impact of CEO competence on company performance.
One straightforward metric gauged managerial ability at entry into and exit from regulatory scrutiny. It found that a good CEO can remove their firm from regulatory scrutiny on average 8% to 16% faster than a poor manager.
“We find managerial ability is inversely related to the amount of time a firm spends in distress, the likelihood of a firm’s failure, and the cost of failure,” the authors write. “These results suggest that the managers of failed firms are less skilled than their counterparts.”
Though many have long suspected this, it’s nice to now have the numbers to back it up.
Bill Kenealy is a senior editor with Insurance Networking News.
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