Companies have better financials with CEOs who admit mistakes: Canadian study

A recent study from researchers at the University of British Columbia shows that when CEOs admit their mistakes and take responsibility for unfavourable actions, it positively impacts the company's value. (Pexels)

A recent study from researchers at the University of British Columbia shows that when CEOs admit their mistakes and take responsibility for unfavourable actions, it positively impacts the company's value.

The study, titled "The Role of CEO Accounts and Perceived Integrity in Analysts' Forecasts," conducted an analysis of data derived from 35,000 CEO conference calls with investors.

This dataset covers a 12-year period, spanning from 2002 to 2013, and aimed to determine whether the companies under scrutiny performed favourably or unfavourably.

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CEOs were examined based on how they explained their companies' performance in quarterly earnings calls, whether attributing it to internal factors like leadership or external factors such as supply issues, geopolitical conflicts, or economic shifts.

The data shows that when a company performed poorly and the CEO took responsibility, analysts' forecasts were notably higher compared to instances where the CEO attributed the poor performance to external factors.

Yet, in cases of favourable company performance, CEO explanations for success had minimal impact on financial analysts' forecasts.

In a follow-up experiment, researchers gave fictional earnings call scripts to 300 financial analysts, with some scripts featuring CEOs blaming external factors for poor results and others having CEOs taking responsibility. Analysts then assessed the CEOs and provided forecasts.

"Again we found that CEO accounts didn't matter a whole lot when the company performed favourably," UBC professor Daniel Skarlicki said in a press release.

"But, when the performance was unfavourable and CEOs pointed to internal factors – things they were responsible for, they scored higher in integrity — and that higher integrity in turn yielded higher financial forecasts."

When it comes to why would analysts value a company whose top leader takes the blame for bad news, Skarlicki points to a psychological phenomenon called the "actor-observer bias."

Skarlicki brings an example of Microsoft CEO Satya Nadella. In 2014, Microsoft acquired Nokia's mobile phone division for over $7 billion in an effort to compete with Apple and Google, which ultimately turned out to be a failure. Nevertheless, when faced with this challenge, Nadella took prompt responsibility and initiated a significant restructuring, focusing on cloud computing and productivity software. This strategic move led to a significant increase in Microsoft's stock price.

"When a business does well, the CEO tends to credit internal forces, but outside observers are more likely to attribute the success to external factors. Similarly, when things go wrong, the CEO often points to outside forces, while outsiders scrutinize the CEO. When a CEO admits their mistakes, it can make them seem more trustworthy which can benefit the company," the study said.

Reporting for this story was paid for through The Afghan Journalists in Residence Project funded by Meta.