Importance Of CEO Reputation For Capital Investment And Company Value

The Value of Top-Level Management

The productivity and capital accumulation of any company is directly dependent on the value of leadership and management that tops the company.  Considering the fact that a company cannot control itself as an entity but depends on the management of its officers, the value injected into the mainframe management is of critical importance. Among the values injected into the mainframe management is reputation or goodwill of quality, effectiveness, capability, and efficiency of service delivery, capital management prowess as well as excellent relationship with the stakeholders. At the top of these managements is the company’s Chief Executive Officer whose name, value, capability, and performance dictates a vast section of the direction that the company takes towards productivity and position in the industry. Therefore, while examining the individual characteristics of a company’s chief executive officer, it also important to examine the value that is attached to the reputation of the same officer, especially to the company. The main objective of the study is to discuss the importance of CEO reputation for capital investment and company value.

In the contemporary corporate management, a company has discrete possession as well as administration. Therefore, the company’s CEO is seen as the uppermost status operative or officer with massive roles in construction investments, operating conclusions as well as in financing. Each of these roles yield different values based on different individual characters and capabilities.

While the company’s performance is dependent on the performances of the internal factors such as the existing capabilities in innovation, workers, and the management, it is important to understand that there are external factors that are very crucial for the performance of the company as well. The collective term of these external factors is stakeholders. Stakeholders of a company involves the company itself, but also include the interested parties such as the suppliers, the customers, the competitors, the government, the community served by the company, the investors among others.

Upon the establishment of this fact, it is also critical to assert the unrivaled importance of the relationship that exists between the companies the stakeholders. In one way or another, the stakeholders can lead to the downfall or the rising of the company since most of the stakes of the company are controlled by the stakeholders. Secondly, it is also to accept the fact that the company’s values and mission as far as those that are stakeholder’s relational are steered by the company’s top management. At the top of the management is the company’s Chief Executive Officer is in most cases the secretary to the company’s Board of Directors of the same company.  By this, the valued position of the company’s Chief Executive Officer is too important to assume. A well reputed leader will make the company reputable and the reverse is true. This notion is based on the concepts of stakeholder engagement and corporate governance.

The Role of CEOs in Building Company Reputation and Goodwill

Through the notion of stakeholder engagement, (Love, Lim & Bednar, 2017) argues that a company’s Chief Executive Officer is the most influential employee of the company holding a very influential role and position in the company. Based on the study done by (Borghesi, Houston & Naranjo, 2014), the CEO’s repute, which is defined as the awareness of the market of the ability of the Chief Executive Officer, is in a position to possibly mitigate the company’s problems between the stakeholders and the company. Through empirical studies on reputation, (Liu, Liu, & Luo, 2016) shows that the reputation of a company can affect its values and position in the market.

Certain studies have come up to advocate that the human capital of the Chief Executive Officer is demonstrated by the performance of the his or her time. Among the studies is (Fetscherin, 2015), which indicated that firms that lose high-performing chief executive officers or managers to other firms experience a negative stock return, while firms that experience the unexpected demise of managers performing poorly experience a positive stock return. More than that, (Park & Ghauri, 2015) states that in most cases, the investors of a company have a tendency to react positively or negatively to the report of a CEO dismissal/departure in frims that are performing poorly or excellently respectively, due to the Board’s inclination to do away with the poorly performing leaders.  

According to Park & Ghauri (2015), the employees’ reputation is a reflection of the quality of the Chief Executive Officer’s management, thus reducing the adverse selection problem in the labor market. In addition, (Mullins & Schoar, 2016) demonstrates the evidence of fewer moral hazard problems in firms with more reputable managers because the managers’ reputation is highly related with the performance of the firm in which they hold an office. In this case, this concerned reputation is used highly in the determination of the price or value of the CEO in the labor market. Therefore, it is prudent to states that reputation of the CEO has power to reduce information biasness and to increase the market value of the company. These two facts have a significant contribution the company’s corporate capital investment.

For this reason, (Jian and Lee, 2011, p.929) posit that when it comes to investment, there is one more important factor that counts apart from the company’s characteristics such as size, market-to-book ratios as well as the leverage that the company may have on the reaction on the stock price for its capital investment. This important factor is the credibility of the signal to these company attributes, which is the relationship between the CEO’s reputation and the corporate capital investment. The managerial human capital of the CEO is among the top most important elements in explaining the economic effect of the company’s corporate capital investment (Kang, 2016).

The Importance of Stakeholder Engagement in Corporate Performance

In his contribution of the ‘reputation the new oil’,  Shandwick (2015, p.2) noted that despite the constant challenges that have faced the reputation of most CEOs in the wake of the 2008-2009 financial crises and beyond, the reputation of the companies CEOs have never failed in its position of influence. In this case, Shandwick (p.2) argues that the financial crises left company management in a very challenging task, most companies decline and the reputations of most CEOs were left corroded. However, today, the CEO’s reputations continue to be the pivotal driver of the overall reputation of any corporation as well as being constant in contributing the market value of the companies. Therefore, these studies conclude that the reputation of a company’s CEO is the first-class form of currency and wealth in the global competitiveness where reputation or goodwill in the market is the single most important asset of competitiveness (Zerfass & Sherzada, 2015).

In the financial market, it makes investment logic to argue that reputable borrowers have the enjoyment of reduced or lower interest rate compared to the borrowers with lower reputation. In addition, individuals of good reputations gain stronger and better incentives.  This means that value is important and is entirely and directly dependent on reputation, which is represented by high performance ability as well as the incentive to reduced risk taking. This value that is obtained from the reputation of the company and the CEO must have a controlling power (Jung & Seock, 2016). This power and control is dictated by the company’s Chief Executive Officer by his or her critical influence on the operational and financial decisions that are made by the company, most of which have direct effects on the company’s market value and the company’s corporate capital investment.  Better corporate decisions are based on the individual characteristics of the decision makers in terms of their corporate maturity, tenure, know how as well as career experience especially pertaining to corporate investment decisions.

Conclusion

According to the information given and the researches that have been done in the corporate governance and market value position in the contemporary competitive markets, it is prudent to state that the value of the company and the reputation of a company’s give the highest company appeals. No matter the previous and current position and valuation of the company, when these two factors are defiled or damaged, the future is not predictable positively. The highest ranking employee of any company is the Chief Executive Officer, upon whom the mirror of performance and market valuation is focused. This means that the CEO of the company has the greatest role to maintain or raise the market value and corporate governance as well as corporate capital investment. This role is played using the single most powerful tool or weapon, which is reputation. Therefore, upon this background it is proper to conclude that the reputation of the CEO accounts for more than half the company’s market valuation and corporate capital investment.

References

Borghesi, R., Houston, J. F., & Naranjo, A. (2014). Corporate socially responsible investments: CEO altruism, reputation, and shareholder interests. Journal of Corporate Finance, 26, 164-181.

Fetscherin, M. (2015). The CEO branding mix. Journal of Business Strategy, 36(6), 22-28.

Jian, M and Lee K.W (2011), ‘Does CEO reputation matter for capital investments? Journal of Corporate Finance, 17, pp. 929–946.

Jung, N. Y., & Seock, Y. K. (2016). The impact of corporate reputation on brand attitude and purchase intention. Fashion and Textiles, 3(1), 20.

Kang, J. (2016). Labor market evaluation versus legacy conservation: What factors determine retiring CEOs’ decisions about long?term investment?. Strategic Management Journal, 37(2), 389-405.

Liu, A. X., Liu, Y., & Luo, T. (2016). What drives a Firm’s choice of product recall remedy? The impact of remedy cost, product hazard, and the CEO. Journal of Marketing, 80(3), 79-95.

Love, E. G., Lim, J., & Bednar, M. K. (2017). The face of the firm: The influence of CEOs on corporate reputation. Academy of Management Journal, 60(4), 1462-1481.

Mullins, W., & Schoar, A. (2016). How do CEOs see their roles? Management philosophies and styles in family and non-family firms. Journal of Financial Economics, 119(1), 24-43.

Park, B. I., & Ghauri, P. N. (2015). Determinants influencing CSR practices in small and medium sized MNE subsidiaries: A stakeholder perspective. Journal of World Business, 50(1), 192-204.

Weber Shandwick (2015) ‘The CEO Reputation Premium: Gaining Advantage in the Engagement Era’, March, pp.2-24. Online version accessed 27/06/2018.

Zerfass, A., & Sherzada, M. (2015). Corporate communications from the CEO’s perspective: How top executives conceptualize and value strategic communication. Corporate Communications: An International Journal, 20(3), 291-309.