Sunday, September 16, 2007

Edifice Complex

Scholars Link Success of Firms To Lives of CEOs
Two Penn State professors recently attempted to rate CEOs of technology companies on their degree of narcissism. They looked at things like the size of executives' photos in annual reports and how often they use the first person singular in press interviews. The authors concluded that narcissistic executives tended to take greater risks, leading to bigger swings in profitability of their companies. The study, called "It's All About Me," is to be published in Administrative Science Quarterly.

The new research is part of a more nuanced approach to studying management. Instead of assuming all CEOs are devoted to maximizing wealth for themselves or shareholders, researchers posit that executives can have other aims, like building a legacy or showing off wealth through a mammoth house. These may be perfectly rational behaviors, but hardly ones that are in shareholders' interest.

The median size of their principal homes was a little over 5,600 square feet. Some were far bigger. A key finding was that stock performance tended to deteriorate after a CEO bought or built an extremely large or costly estate, which they defined as over 10,000 square feet or sited on more than 10 acres. On average, these companies' stocks underperformed the S&P 500 index by about 25 percentage points over the three years after the purchase.

For what it is worth, things went downhill at the company where I once worked when plans were announced that we'd be moving into a new, more luxurious, and much more spacious building. I suspect it is not entirely a coincidence. It was very odd to be talking about the new space one day and see people being laid off the next (many rounds of layoffs followed and a few years after I left the doors were closed entirely). At some point it became a joke. There weren't going to be nearly enough people left to fill the new space.

Then there's the RadioShack story. I could not understand why a struggling business (in my opinion) would be building itself a new corporate shrine. "Shrine" is also my opinion. Take a look at the pictures and description. Decide for yourself.

RadioShack Riverfront Campus

It was completed in May, 2005. Have you increased your purchases at their stores since its completion? Do you think that money could have been better spent upgrading the look of their actual retail stores instead?

S&P 500 Leaders & Laggards: RSH CAH
RadioShack rose $1.60, or 7.3 percent, to close at $23.66. In a client note, a Citigroup analyst said he believes the electronics retailer plans to sell video game software in stores in time for the holidays.

Yeah, well, maybe they should try selling organic milk too. That seems to be fairly hot right now. Meanwhile, their shareholders are looking at a stock that has traded sideways for five years. So much for the theory that a rising tide of liquidity can raise all boats.

And lastly, if stocks tend to underperform after we (CEOs specifically) become enamored with high priced real estate, what does that say about our future? We sure built a lot of skyscrapers heading into the Great Depression. China sure is building a lot of skyscrapers right now.

Six years post-9/11, super skyscrapers rise from U.S. cities
“Tall buildings are being used to project a certain status for a city on a world stage. That's undoubtable,” Wood said. “For a city to be taken seriously on a local or domestic or international scale, they want to be seen to be keeping up with the times, and tall buildings are part of that.”

Sky no longer limit for skyscrapers
"I think the age of the super-skyscrapers is just starting again," said George Efstathiou, a Chicago architect for the Burj Dubai.

New York Skyscrapers
40 Wall Street: Built in 1929 as the headquarters of the Bank of Manhattan, this was intended to be the world's tallest building.

70 Pine Street: Lower Manhattan's tallest building - an elegant 67 story art deco structure - was completed just before the Great Depression, at the height of New York's skyscraper- building frenzy.

The Empire State Building: The most famous of all skyscrapers, the Empire State Building was the world's tallest for 41 years. Its sheer size caught people's imagination when it was completed in 1931 after just one year of construction.

Let's not forget the 1970s!

Sears Tower: At the time the Sears tower was constructed in 1974, it was the world's tallest building, eclipsing New York's twin-towered World Trade Center by 26 meter.

For those who may not recall, 1974 marked the start of a VERY nasty recession for us and the rest of the 1970s were rather unpleasant as well (extreme stagflation).


Anonymous said...

I wonder if this behavior is typical of companies as they become moribund? UNOCAL had it's versions of this in the years following T. Boon Pickens' hostile take-over attempt in the 80's . Unocal never recovered from their "poison pill" but sure wasted a lot of money on stupid "make-up on a pig" projects. Like Radio-Shack, they drifted along until they were, mercifully, subsumed into the Chevron behemoth.

Stagflationary Mark said...


I wonder too. I'm also reminded of the lavish parties Tyco was having as the you know what was meeting up with the fan.

And why does Scottrade, a "discount" broker, flaunt its black helicopter in its commercials?

Look What I Can Do (with your money)!