515th Convocation keynote address: Corporate Governance: Is It Personal?

Abbie Smith, the Boris and Irene Stern Distinguished Service Professor of Accounting at the University of Chicago Booth School of Business, addressed the University of Chicago community at the institution's 515th Convocation.

Good morning. What an honor to be here with you, Class of 2013, and your families, friends, faculty, staff, and trustees, all 20,000 of us, to celebrate your graduation from the University of Chicago. Today is your day.

You have worked hard to get here…from your first nap in kindergarten until a few days ago, you did reading assignments, math problems, science projects, term papers, exams and more exams. At the beginning of every term, the faculty laid out what they expected of you, and how they would evaluate your performance. The course material changed every term, but the measure of success remained the same. And you aced it!  You are graduating from one of the premier universities in the world.  Give yourselves a hand!

Now you are about to begin your next chapter. You are loaded with potential and driven to succeed. What does that mean? How will you define and measure your success from now on

My theme today is “Corporate Governance: Is It Personal?”

In short, corporate governance research studies how corporations such as Apple or Amazon, set and pursue their goals, and how this affects their performance.

While I was preparing for today I realized that there is a personal message in this research for all of us.  The message isn’t new. It has been repeated throughout history and even in one of my favorite songs: “Make someone happy, and you will be happy, too”. But often the message is forgotten. So I’ll try to make the case today, speaking from a research perspective and from the heart.  Trust me; it is best that I don’t try to sing.

So what does corporate governance research have to do with success, happiness, and you?


Regardless of what products a firm makes, iPhones, smart cars, or Miller Lite beer (not to be used at the same time, by the way), the firm is a network of people and their relationships…relationships between the firm’s employees and customers, between employees and investors…and between one employee and another.

Traditionally governance researchers have overlooked the human side, instead trying to explain firm behavior and performance on the basis of impersonal country, industry and firm characteristics.

But now researchers are beginning to look for answers inside firms…at the values of the Chief Executive, and finding that firm behavior and performance vary in a powerful and intuitive way with the Chief Executive’s values.

Corporate governance is personal.

And examples of this phenomenon in other types of organizations, e.g. charities, governments, schools, families, suggest that this pattern is not unique to companies like Apple or Amazon.

To illustrate the impact of executives’ values, I’ll begin with a cautionary tale of two CEOs; i.e. two Chief Executive Officers who ran the same company, one right after the other. While the story takes place in a business setting, the message is universal.

The two CEOs had a lot in common. They made it to the top of the same corporation. When they got the top job, they had similar resumes, with graduate degrees and years of work experience in the same industry. Like you, they were bright and driven to succeed. They were confident, courageous, and eager to take on the new challenge.

But their values differed.

The first CEO, who we’ll call “Lavish”, had a more extravagant lifestyle outside the office, and was focused on acquiring more and more material possessions and status in the community.

The second CEO, who psychologists would call “Frugal”, appeared to be less driven by material desires, and more highly motivated from within by long term intangibles, such as the satisfaction from personal growth, building long-term relationships, and helping others.

How did the firm differ under the leadership of Lavish and Frugal?

Lavish and team had an extravagant managerial style with little restraint on corporate spending.

Frugal and the same management team ran a tighter ship with stronger information and control systems and more disciplined spending.

Lavish and team focused on acquiring other companies to grow the firm quickly.

Frugal and team focused on building the firm from within, growing long term profits by finding ways to do things better and selective long term investments.

Under the leadership of Lavish, customer satisfaction was spotty, and investors, often left in the dark, were disappointed repeatedly by poor earnings performance, questioning whether the firm could continue.

No CEO successor was groomed and employees felt unfulfilled.

In contrast, Frugal’s top priorities were building relationships with employees, customers, and investors, and creating a corporate culture focused on nurturing these relationships.

Managers and other employees were trained and developed, and felt engaged, purposeful, and energized.

Employee safety and diversity, customer satisfaction, investor relations, and the treatment of the environment improved substantially, and profits hit a record high.

And the legacy continues today. The firm is trusted by employees, customers and investors, providing a strong foundation for continued success under the leadership of Frugal Jr. (no relation) groomed over the years by Frugal Sr.

Is this story realistic?

Based on a sample of hundreds of corporations, our preliminary research documents a powerful relation between several dimensions of CEOs’ values and the behavior and performance of the firms they run.

For example, we find that firms run by CEOs with a prior legal record (e.g. speeding tickets and driving under the influence of alcohol) are significantly more like to be charged for financial reporting fraud.

And firms run by CEOs with a relatively frugal lifestyle, about half of our sample, are significantly more frugal– characterized by relatively disciplined corporate spending, efficient use of goods and services, long term perspective, and concern for others.

Specifically, we find that such firms are:

  • less likely to acquire other companies,
  • more likely to build from within by:
  • improving efficiency, and long term investments in innovation and succession planning,
  • more focused on information and control systems, and
  • more transparent in communications with outside investors,
  • less likely to go bankrupt,
  • more socially responsible in the treatment of employees, customers, investors, and the environment, and
  • more likely to convert social responsibility into future firm profits.

We also find that over time, as some CEOs’ lifestyles become more and more extravagant, their firms’ social responsibility scores decline, affecting the lives of many, even those who don’t know their names.

These results are highly intuitive…maybe even obvious…..once you to stop to think about them.

But often we overlook the obvious.

For decades governance researchers have overlooked the importance of executives’ values. 

Do we think about our own values as often as we should?

The personal message in this research is not to disparage a luxurious lifestyle, status or fame…..but rather to stay mindful of our values and their impact on others.

Research suggests that personal growth, social connections, and helping others, are the stuff that fulfill us…sometimes more than we expect. It is easy to lose perspective, and redirect our energy away from these “intangibles”.  

So I’d like to conclude with a personal governance exam, your last exam at the University of Chicago. Unlike prior exams, this one is meant to be taken again and again. While an annual physical or a tune up of a smart car can keep your engines running, a regular examination of your values can keep you running in the right direction.

The exam has one basic question. It is where we started.

How do you define and measure your success?

Ask yourself this question as you go through life, and see if your answer changes.

History, music, and research suggest that your answer will have a profound effect on whether you realize your full potential, on your happiness, and on the happiness of others.

Congratulations on your achievements at the University of Chicago.

I wish you much future success, bringing happiness to you, those fortunate enough to know you, and even those who don’t know your name.

Thank you.