Product safety recalls are crucial to ensure that consumers are kept as safe as possible. Research from Indiana University reveals, however, that rather than being purely driven by consumer needs, the propensity to recall products can instead be driven by the length of tenure of the company’s CEO.
The study found that CEOs who are new in the post were more likely to issue a product safety recall than a CEO who had been in post for longer.
“We believe this is the case because newly tenured CEOs can attribute blame for the recall to the previous CEO,” the researchers say. “This phenomena is even more likely when the previous CEO left under poor circumstances, becoming more blame-able.”
Under the carpet
The study found that three years appeared to be the magic point, after which CEOs were more likely to want recalls to go unannounced. The authors believe this is probably because once executives have been in post for that long they’re more likely to shoulder the blame for the bad news and therefore look to avoid that wherever possible.
“We do not have data to demonstrate if this behavior is conscious or unconscious on the part of firms and their CEOs,” the researchers say. “It may be a behavioral bias that CEOs are not even aware of, but the effects we find are very strong.
“A recent example of this phenomenon is the hesitancy by Peloton to recall their hazardous treadmills. John Foley, the CEO, has been in the role quite some time and is the co-founder of Peloton. He clearly knew he would—and has—taken the blame for Peloton’s treadmill recall and how it was handled.”
Doing the right thing
The authors highlight that the consumer product industry is relatively lightly regulated, especially in comparison to industries such as autos and pharma, where product recalls are also common. This creates an environment whereby the timing of the recall can allow firms to manipulate the situation to try and ensure no blame is placed on the CEO.
The researchers analyzed data from 125 listed firms, whose 307 CEOs enacted 584 product recalls between 1992 and 2016. The data revealed that product recalls were 77% higher in the early stages of a CEO’s tenure than they were after that three-year period.
They propose a number of policy recommendations to help alleviate the problem, including the suggestion that the Consumer Product Safety Commission learns from the FDA in terms of how drug recalls are managed. The FDA, for instance, requires firms to include the “defect awareness date” in any recall announcement, which allows the FDA to examine how long the issue was unfolding within the firm.
“The average time between defect awareness and recall initiation in FDA-regulated medical product firms is about 90 days,” the researchers say. “If CPSC collected such data, it would become more difficult to delay a needed recall. It’s surely more than 90 days right now, for certain firms and certain CEOs.”
Similarly, firms in the auto or medical device sectors have board committees that are focused on both product equality and any recalls that the firm has to make.
“In our review of publicly traded consumer product firms, very few had such board committees,” the authors conclude. “This board governance recommendation can help directors oversee executive product quality decision-making and may help alleviate the problems we find in our study.”
