A key function of corporate boards is to ensure that CEOs are rewarded (or punished) appropriately for their performance. Research from the University of Notre Dame examines whether boards are good at this job or not.

The authors explain that while boards are heavily responsible for things like rewarding, sanctioning, and monitoring CEOs, the media also plays a crucial role by helping to disseminate key information about firms and the bosses who lead them.

“We find that boards of directors and the media do accurately reward CEOs based on their performance,” the researchers explain. “Higher-performing CEOs earn more, are dismissed less and receive more CEO media awards.”

Effective Governance

The study looks at performance based on the impact the CEO has on the firm within the context of the performance they inherited and the time period in which they ran the firm. After establishing this relationship, it examines the signals that boards and the media may use to ascertain quality.

Using advanced linguistic methods, the researchers show that CEOs differ in the language they use. More specifically, they introduce the idea of CEO unscripted novelty, or how much a CEO deviates from the prepared portion of earnings calls in the unscripted question-and-answer portion.

They looked at CEOs and performance from the S&P 500 using company financials, media reports and earnings calls transcripts, and studied CEO pay, dismissal and CEO of the Year awards. They used a separate sample to look at earnings calls and unscripted novelty and used natural language processing as a method to understand the topics CEOs discuss during their calls.

“CEO quality is positively related to unscripted novelty, which positively influences stock market reactions,” the researchers explain.

Past research in this area has attempted to relate board characteristics, such as the proportion of independent directors or CEO duality, to short-term performance. This study takes a broader look at relationships, which the researchers believe should re-energize boards and remove some of the pessimism around their role, as well as linguistic signals that can indicate CEO quality.

“Our results should encourage board members to pay attention to the language CEOs are using in their earnings calls to understand motivations and ability based on what they say,” the researchers conclude.