Any investor wants an edge — knowledge about how a specific company will do. Insider trading could leave you confined in jail. Instead, talk a walk out to the golf course. According to a recent report in the journal Management Science, when the CEO plays too many rounds, corporate performance drops.
Researchers from Miami University in Ohio, Auburn University in Alabama and the University of Tennessee were interested in whether overindulgence in leisure time might distract a chief executive. If so, would his or her company's results feel an impact?
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Tracking an executive's leisure time is virtually impossible. But the researchers found that golf could act as a proxy and there was a way of measuring time on greens for many CEOs. The U.S. Golf Association has a database for serious players called the Golf Handicap Information Network, or GHIN, which is touted by the association as the "largest handicap computation provider in the world, serving more than 2.3 million golfers from 84 golf associations, federations and unions that collectively represent more than 14,000 golf clubs." Golfers, both professional and amateur, volunteer score information.
"I went through, took a list of CEOs, where they were headquartered, looked for them in the system, and then looked at their scores," said Lee Biggerstaff¸ assistant professor of finance in Miami University's Farmer School of Business and a study co-author. The result was 363 S&P 1500 CEOs that were also listed in GHIN. The researchers tracked reported rounds of golf between 2008 and 2012 and matched them to the fiscal years of the corresponding companies.
More than 57 percent of the CEOs would be considered under USGA definitions either "core" (eight to 24 regulation rounds a year) or "avid" (25 or more regulation rounds a year) golfers. CEOs in the top quartile of golfing rounds played a minimum of 22 rounds a year and averaged 37 rounds, or three times a month. Because these are reported rounds, any or all of the CEOs could be playing more frequently.
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"It is such a huge time commitment," Biggerstaff said. A golf outing can easily take several hours or more. "Depending on how far you're from your course and other activities, it can feel like it takes an entire day," Biggerstaff noted. And those are hours taken away from a job that can be consuming. "We're certainly not saying that leisure is bad," he said. "What we're picking up here is variations in how much effort CEOs are providing their firm.”
The variations seem to show a correlation with corporate results. "What we found in our samples was, if we examine company performance by return on assets, the CEOs in the top quartile had an ROA that was a negative 115 basis points," Biggerstaff said. In other words, the return on assets of those CEOs' companies was generally 1.15 percentage points lower than the average, which was 5 percent. "It's like a 20 percent deviation," the researcher said.
The firms were, on average, large and had an enterprise value — a measurement of corporate size combining equity and debt — of $38 billion. The assets of companies of this size are likely to be significant. The difference in return generated by average performance and the below average performance seen in the most frequently golfing CEOs has a "pretty big impact to shareholders," according to Biggerstaff.
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A modern theory of CEO compensation is to focus on stock options and stock grants so the executives will act like shareholders. Those pay packages also correlated to how often a CEO hit the links. "The guys who have the least amount of stake in their firm play the most golf," Biggerstaff said. "How strong your incentives are impact your labor-leisure choice."
There was another correlation: The CEOs most likely to play a lot of golf were also most likely to lose their jobs. "We are finding evidence that if you play a lot of golf you tend not to be the CEO next year," Biggerstaff said. "The boards appear to have some monitoring and are reprimanding by the strongest measure they have, which is, ‘We're going to get rid of you.’" Until the board acts, though, the CEO may have plenty of opportunity to slack off — affecting the company’s return on investment before they’re shown the door.
To suss out such hazards, anyone can use GHIN and check the reported playing activity of a CEO. The database only records the last 20 rounds, but it includes dates so you can see whether those games were spread over five years or five months. The technique won't catch people goofing off in other ways, but at least it's something.
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"This is anecdotal evidence, and at this point third-hand, but I've been told through friends that some institutional investors have already been collecting data like that," Biggerstaff said. "They're out there looking to see if these guys are goofing off."
Of course, as this type of check becomes more popular, CEOs could scrub their handicap reporting by not entering rounds. "If you were a CEO and wanted to no longer face that scrutiny,” Biggerstaff said, “you would stop recording those rounds or maybe record one or two a year so it looked like you were working really hard.”
For golf-loving CEOs, that would give a whole new meaning to the term “bad lie.”
