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Oriana Bandiera Luigi Guiso Andrea Prat Raffaella Sadun
Copyright © 2011 by Oriana Bandiera, Luigi Guiso, Andrea Prat, and Raffaella Sadun Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.
What Do CEOs Do?
Oriana Bandiera London School of Economics Luigi Guiso European University Institute and EIEF Raaella Sadun Harvard University
Andrea Prat London School of Economics
February 25, 2011
Abstract We develop a methodology to collect and analyze data on CEOs’ time use. The idea — sketched out in a simple theoretical set-up — is that CEO time is a scarce resource and its allocation can help us identify the ﬁrm’s priorities as well as the presence of governance issues. We follow 94 CEOs of top-600 Italian ﬁrms over a pre-speciﬁed week and record the time devoted each day to dierent work activities. We focus on the distinction between time spent with insiders (employees of the ﬁrm) and outsiders (people not employed by the ﬁrm). Individual CEOs dier systematically in how much time they spend at work and in how much time they devote to insiders vs. outsiders. We analyze the correlation between time use, managerial eort, quality of governance and ﬁrm performance, and interpret the empirical ﬁndings within two versions of our model, one with eective and one with imperfect corporate governance. The patterns we observe are consistent with the hypothesis that time spent with outsiders is on average less beneﬁcial to the ﬁrm and more beneﬁcial to the CEO and that the CEO spends more time with outsiders when governance is poor.
We thank seminar participants at Catholic University of Milan, Columbia University, EEA Meetings, Harvard Business School, Imperial College, IMT Lucca, LSE, MIT, New York University, NIESR, Universitat Pompeu Fabra, Stockholm (IIES), and the University of Sussex for useful comments. We are grateful to Tito Boeri, Daniel Ferreira, Luis Garicano, Steve Pischke, Imran Rasul, and Fabiano Schivardi for useful suggestions. This research was made possible by generous funding from Fondazione Rodolfo Debenedetti.
Time management has been at the core of the research on management for almost ﬁfty years. Peter Drucker (1966) makes it the centerpiece of his celebrated book on eective management: “Eective executives know that time is the limiting factor. The output of any process is set by the scarcest resource. In the process we call ‘accomplishment’, this is time.” More recently, the importance of time constraints for people at the top of organizational hierarchies has been recognized by a number of economic models, like Radner and Van Zandt’s work on hierarchies (surveyed in Van Zandt, 1998), Bolton and Dewatripont (1994), and Garicano (2000). Intellectual tasks — information processing in Radner-Van Zandt, communication in Bolton-Dewatripont, problem solving in Garicano — require managerial time, which is particularly scarce at the top of the organization. As a consequence, a key question in organization economics is whether and how managers allocate their time to maximize ﬁrm performance. The theoretical and practical interest, however, are not matched by adequate empirical evidence, as ﬁrm datasets typically contain no information on managerial time use, while existing studies of managerial time use are mostly based on very few observations and have not been matched to ﬁrm level outcomes. This paper makes a step towards ﬁlling this gap by developing a methodology to systematically collect information on how CEOs allocate their time between dierent work activities. We develop a time-use diary for CEOs and we use it to record the time allocation of a sample of 94 CEOs belonging to leading Italian companies in various industries over a pre-selected work week. A minimalistic model of managerial use of time guides our interpretation of observed dierences in time allocation patterns, and how these are related to the ﬁrms’ priorities and to dierences between the ﬁrms’ and the CEOs’ interests. To collect the time use data, we ask the CEO’s personal assistant (PA) to keep a diary of the activities performed by the CEO during a pre-speciﬁed week (from Monday to Friday). The PA has full information on the CEO’s schedule and he/she has a good understanding of the functions of the people that his/her boss interacts with.1 The PA reports overall working time and records in a diary all the activities of the CEO that last longer that 15 minutes detailing their characteristics, in particular information on other participants. To operationalize the concept of time allocation, we group activities according to whether they involve employees of the ﬁrm (insiders) or only people external to the ﬁrm (outsiders). Insiders are listed by functional area, for instance ﬁnance, marketing, or human resources.
Roxanne Sadowski, Jack Welch’s long-term PA, makes this abundantly clear: “For more than fourteen years, I’ve been human answering machine, auto dialer, word processor, ﬁltering system, and fact checker; been a sounding board, schlepper, buddy, and bearer of good and bad tidings; served as a scold, diplomat, repairperson, cheerleader and naysayer; and performed dozens of other roles under the title of ‘assistant’.”
it is a dimension over which the CEO’s and the ﬁrm’s interests might be misaligned.and in particular the dierential impact of time spent with insiders vs. CEOs spend more time outside the ﬁrm in activities.3 Our data reveal that. ﬁnance and economics literature.is a priori ambiguous. Our empirical analysis is aimed at making sense of the wide heterogeneity on this dimension of time allocation choices. Laﬂey (2009) views the link with the outside as the raison d’être of the top executive: “The CEO alone experiences the meaningful outside at an enterprise level and is responsible for understanding it.Outsiders are grouped in categories CEOs normally interact with. investors. argues that CEOs have strong incentives to seek visibility. markets. Second. More interestingly. As a matter of fact. The search for external. Of these most are employees of the same ﬁrm. interpreting it. and customers ” (Drucker. Since the implication of dierent time allocation choices . First. by cultivating personal connections with inﬂuential business leaders. and the Outside of society. as expected. for instance suppliers. In line with this. and that this shift in activities does not contribute to ﬁrm’s performance. these averages hide a great deal of heterogeneity. outsiders . both in terms of number of hours worked and time allocation. the CEO chooses how much time to devote to a number of possible Procter & Gamble’s CEO A. A majority of CEOs spend very little time (less than 5 hours per week) alone with outsiders.” 3 Khurana (2002)’s view is that the market for CEOs is deeply ﬂawed. or consultants. CEOs spend the majority of their time with other people (85%). charismatic “corporate saviors” leads boards — and the executive search companies they employ — to give their preference to highly visible personalities that can more easily be "sold" to the ﬁrm shareholders. spending time outside the ﬁrm is an important (if perhaps not the most important) role of the CEO. 2 At the other end. economy. 2 3 . however. but over 10% of them spend over 10 hours a week. but many are not. for instance. advocating for it. such as writing books and playing golf. G. 25% with both insiders and outsiders and 16% with outsiders alone. CEOs spend 42% of their time with insiders only. proﬁt. On average. it captures the essence of the CEO’s job: “The CEO is the link between the Inside that is the organization. the optimal inside/outside balance is the subject of controversy in the management. The insider/outsider classiﬁcation is ideal for our purposes for two reasons. by cultivating personal connections with inﬂuential business leaders. and total shareholder return (TSR) growth. technology. and presenting it so that the company can respond in a way that enables sustainable sales. Malmendier and Tate (2009) show that when their power vis-a-vis the ﬁrm increases. this creates an incentive for CEOs to seek visibility. a widely held view is that since the CEO is the "public face" of the company. an increasingly popular view points out that time spent with outsiders might mostly beneﬁt the CEO without contributing to creating value for the ﬁrm. we develop a minimalistic model of managerial time allocation that allows us to distinguish productive activities from activities that mostly confer private beneﬁts to the CEO. At one end of the spectrum. cited in Laﬂey 2009). Khurana (2002). We use this framework to shed light on whether time with insiders and outsiders can be interpreted along these lines. In our model. In turn.
in absolute terms. We expect the latter to have stronger governance as multinational ﬁrms face global competition and therefore need to provide steeper incentives to maintain their productivity advantage (Bloom and Van Reenen 2010 and Bandiera et. the observed variation in time allocation partially reﬂects dierences in the quality of governance that determines the alignment of the CEO’s interests with the ﬁrm’s. devote more time to activities that mostly beneﬁt the ﬁrm and less time to activities that mostly yield private beneﬁts. In this case. The analysis yields three key ﬁndings. We begin by comparing the time allocation of CEOs working for domestic and multinational ﬁrms. we correlate CEOs time allocation with a range of external proxies for ﬁrm level governance. First. Suppose activities can be roughly divided into the ones that beneﬁt mostly the ﬁrm and those that beneﬁt mostly the CEO. their total time at work. the insider/outsider allocation is associated with systematic dierences in CEO worktime. time allocation is determined by both the ﬁrm’s objectives and the CEO’s objectives. corresponding to results 1-3 above. 3. especially in on one-on-one meetings. CEOs who work for ﬁrms with stronger governance devote more time to activities that mostly beneﬁt the ﬁrm and less time to activities that mostly yield private beneﬁts. conditional on the size of the ﬁrm. Guided by the theoretical framework. the observed variation in time allocation is entirely determined by optimal responses to dierent conditions faced by dierent ﬁrms. More precisely. the interpretation of dierences in time allocation between these two sets of activities depends on the extent to which the CEO’s and the ﬁrm’s interests are aligned. we estimate the correlation between the CEOs’ time use. However. In particular. time allocation is entirely determined by the ﬁrm’s objectives. Each of the work activities yield non-negative beneﬁts to the ﬁrm and to the CEO. When these are perfectly aligned. whether it is listed and the industry it is in. If the observed variation reﬂects dierences in governance. networking with clients might increase the ﬁrm’s sale but also increase the chance that the CEO is oered a better job in the future. al 4 . For instance. the model makes precise that the following three sets of correlations must hold: 1. when the CEO’s and the ﬁrm’s interests are not perfectly aligned. In this case. 2. the insider/outsider allocation is systematically correlated with dierences in ﬁrm governance. CEOs who work longer hours. Second. In this set-up. with outsiders. CEOs who work longer hours spend more time with insiders and less time.work-related activities. Time devoted to activities that mostly beneﬁt the ﬁrm is more strongly correlated with productivity than time devoted to activities that mostly yield private beneﬁts. ﬁrm level measures of governance and productivity. or to leisure.
a one percent increase in hours dedicated to insiders is correlated with a productivity increase of 1.g. however. The correlations between time use and the ﬁve independent governance proxies paint a consistent picture: CEOs who work for ﬁrms with better governance devote more time to insiders and less time to meeting outsiders alone. whereas a one percent increase in hours dedicated to outsiders is correlated with a productivity increase of 0. our ﬁndings are consistent with the idea that dierences in time allocation reﬂect dierences in governance and that. In the ﬁnal part of our empirical analysis. compared to time spent with outsiders alone. Section 4 presents a simple time allocation model.g. Since the data at hand. Third. there is some evidence that larger boards reduce the value of the ﬁrm (e.22%. Section 3 explains our empirical methodology and describes the data. and both eects are signiﬁcantly dierent from zero at conventional levels. Taken together. as a more direct (and arguably exogenous) measure of governance quality and restraints on the managers we use the country-level indicator of private beneﬁts of control computed by Dyck and Zingales (2004) on the basis of block control transactions in 39 countries.2010). we use an indicator for whether there is at least a woman in the board with an executive role. We attach this measure of quality of governance to multinational ﬁrms in our sample on the basis of their country of origin and rely on within variation among multinational ﬁrms operating in Italy. Second. Intuitively. we show that the insider/outsider allocation is correlated with ﬁrm performance. owners might face less diculties in monitoring the CEOs’ time use. is not suited to identify the causal eect of governance on time allocation. First. Time spent with insiders is positively correlated with several measures of ﬁrm performance. Lipton and Lorsch. The paper is structured as follows. Yermack. Large boards have long been suspected of being dysfunctional and to lead to too little criticism of management performance. we can make precise the set of assumptions needed to reconcile the ﬁndings with the view that dierences in time allocation reﬂect optimal responses to dierent shocks faced by dierent ﬁrms. as it is in family ﬁrms. thus granting CEOs more freedom (e. Section 5 reports empirical ﬁndings based on our theoretical set-up. Finally. time spent with insiders is more beneﬁcial to the ﬁrm. we compare external CEOs who work for family ﬁrms to those hired by ﬁrms owned by disperse shareholders. 1996). while time spent with outsiders only is not. when ownership is concentrated. we test whether time allocation is correlated with board size. 5 . After a brief literature review in Section 2. For example. following a recent literature pointing at the fact that the presence of women on the board might improve the quality of governance (Adams and Ferreira 2009).22%. The ﬁnal section of the paper discusses these in detail. 1992). Consistent with this view. We then look at variables that proxy for the CEO’s power vis-a-vis the ﬁrm owners.
and in measuring on the job welfare (see. to document how the presence of a ﬂexible agenda allows executives to gather information and build networks within the ﬁrm. based on intensive daily observation of ﬁve managers over a period of ﬁve weeks. spend time at work. and hence it is quite far from other See Hales (1986) for an extensive review of works focusing on the use of time of managers in the management literature. that relates to the diversion of CEOs time allocation.g. studied ﬁfteen high level general managers over a range of nine US corporations using three in depth interviews conducted over a period lasting between six and twelve months. who analyse how workers and middle managers. Our paper studies one particular form of moral hazard. e. a feature that ultimately limits the generalizability of their ﬁndings. The collection and analysis of time use data has experienced a recent surge also in the economics literature. they almost exclusively focus on US based executives. Hamermesh (1990) analyzes time diaries of a sample of 343 US workers to shed light whether time devoted to leisure on-the-job (e. 2 Related Literature The interest in the use of time of top executives is not new in the management literature4 . Nohria and Porter (2009).Section 6 concludes. as well as the ﬁrst documented evidence of the extreme fragmentation and unpredictability of their daily routines.g. 4 6 . or an indicator of shirking. Our analysis is also related to the vast literature that focuses on agency problems for CEOs (see the survey by Stein (2003)). they are all based on very small and selected samples of individuals. Krueger et al 2009). Luthans (1988) records in detail the activities of 44 managers with the aim to identify the determinants of a manager’s success within his or her organization. on breaks) is productive for the ﬁrm. Aguiar and Hurst 2007. Our paper directly addresses these limitations providing. which is one of the key contributions of our paper. provided an in-depth characterisation of the type of activities undertaken by executives. Furthermore. More recently. respectively. Although these studies have clearly played an important role in providing evidence on the nature of managerial work. Kotter (1982). Closer to our paper are Hamermesh (1990) and Luthans (1988). it has not directly tested the implications of dierent time use allocations for ﬁrm performance. with papers that have been mostly interested in shedding light on the work/leisure choice of employees. In a similar spirit. The seminal work of Mintzberg (1973). studied the daily activities of a top US CEO over three full months. the ﬁrst large scale evidence on CEO time use in an international context. Although this literature has also provided a very rich set of information on the nature of managerial activities. to the best of our knowledge.
phone calls etc). their occupational areas (e. 2007. whether it is held regularly and how often. 50 were randomly selected for a pilot survey and the remaining 7 . Table A1 shows how the diary is structured. whether it was scheduled in advance and when. suppliers). (iii) Total value of loan portfolio for banks. whether these belong to the ﬁrm or not. The most closely related study is Malmendier and Tate (2009). Hence. and sitting on boards of other companies.types of misbehavior studied in the literature. For each activity . marketing). a ﬁnding that is not inconsistent with ours in so far time to write books crowds CEO’s out working time rather than his leisure. meetings. who look at what happens when CEOs receive prestigious business awards.g. its duration. One of their ﬁndings is that award recipients appear to devote more time to writing books.g. and if insiders. ﬁnance. we see our paper as complementary to Bertrand and Schoar’s (2003) analysis of management style in a panel of matched CEO-ﬁrm observations.time allocation .1 The CEOs’ Diaries: Descriptive Evidence on Time Use Sources and Sample Description Our main data source is a time use survey.g. playing golf. Finally. The PA is asked to record real-time information on all the CEO’s activities that last 15 minutes or longer in a time use diary. its location. 3 3. The survey eectively shadows the CEO through his PA for every day over a one week period. Each PA is randomly assigned one of ﬁve weeks between February 10 and March 14. a leading Italian investment bank. our goal is to use a direct behavior variable . both in terms of ﬁrm performance and CEO behavior.the diary records information on the type of activity (e. The master sample contains the top 800 Italian ﬁrms from the Dun&Bradstreet data base (2007) and the top 50 Italian banks from the list of all major Italian ﬁnancial groups compiled yearly by the Research Division of Mediobanca.to make inferences on the implicit incentive structure that managers face. Size is measured as yearly revenue for ﬁrms and as the average of (i) employment. this procedure yielded 720 complete records. All 850 institutions were contacted to ascertain the identity and contact details of the CEO. their relation to the ﬁrm (e. investors. While their objective is to identify the ﬁxed eect of individual managers. by summing the time spent over activities in excess of 15 minutes and the time spent in activities that last less than 15 minutes we obtain a measure of the CEO total working time. (ii) Stock market capitalization. The PA is also asked to record the total time the CEO spends in activities that last 15 minutes or less and in transit. if outsiders.deﬁned as a task to which the CEOs devotes time in excess of 15 minutes . The diary also collects information on the number of participants. Of these. which we designed to identify the activities CEOs engage in on a day-to-day basis.
and we miss the characteristics of those that take less than 15 minutes. we also had a higher response rate for ﬁrms classiﬁed in Public Administration. Finally. and had a higher probability of being aliated to the Fondazione Debenedetti. and the remainder is split between private individuals. However. 5 We match the time use data with two further sources. which contains balance sheet data. Panel 1A shows that manufacturing is the most common sector (39%) followed by Finance.. The selection analysis is limited to the sample of 535 ﬁrms that could be matched to the Amadeus dataset 5 8 . the survey was mailed to the PA identiﬁed by the CEO. In terms of industry representativeness. To maintain comparability across individuals. The second is the Infocamere database. The response rate was 18%. Sample CEOs received an ocial invitation letter from the Fondazione Rodolfo Debenedetti that sponsored this project.000 per year.244 employees and its productivity (measured as value of sales per employee) is USD 600. The median ﬁrm in our sample has 1.670 formed the ﬁnal sample. as measured by productivity. proﬁts. which reﬂects our focus on the largest corporations together with a low survey response rate (18%). Table 1 describes our sample ﬁrms and CEOs. the data are cross-sectional in nature. proﬁts and three years sales growth rates. Just under 40% of the sample ﬁrms are widely held. Wholesale and Retail (8%). we could not ﬁnd any systematic dierence in terms of regional location and ﬁrm performance. Business Services and Finance. the sample 30% of the ﬁrms are domestic. 22% belong to families. but it is subject also to a number of limitations which deserve to be mentioned up-front. The ﬁrst is the Amadeus data base. who was asked to record the information and send back the completed forms via either fax or mail. such as size. which provides a rich set of demographic information about all board members with executive and non executive responsibilities. private equity. government and cooperatives. Carlo Erminero and co. Communication and Utilities (13%). For the latter. The implementation of the survey was outsourced to a professional survey ﬁrm. Insurance and Real Estate (15%). headquartered in Milan. productivity. ownership and multinational status for 94 ﬁrms in our sample. Services (14%). followed by a personal phone call explaining the purpose of the survey and the relevant conﬁdentiality clauses. respondents in our sample are CEOs of the Italian We analyzed whether the survey sample was systematically dierent from non respondents in terms of observable ﬁrm level characteristics. yielding complete information on the time use of 119 CEOs. location and industry. The ﬁnal sample contains 94 CEOs. The analysis (presented in Table A2 in appendix) shows that the CEOs participating in our study tended to work for larger ﬁrms. 36% Italian multinationals and 34% Italian subsidiaries of foreign multinationals. we drop ten CEOs who also cover the role of "board president". Transportation. Apart from its small size. We do not observe work-related activities that the CEO may perform in the evenings or on weekends. ﬁrm size. Upon acceptance. Our dataset has obvious strengths and appeals. Construction (4%) and Mining (3%).
Among the top ﬁve categories of insiders -ranked by total time spent. the ratio between the highest (ﬁnance: 8. conference calls and public events. In contrast. as the CEO might be in his oce but not necessarily working. and as such it does not include working time at home or at the weekend. The average CEO in our sample works 47. Figure 2 shows the histograms of total diary-recorded hours. comprise the bulk of the CEO’s time. and we focus especially on the distinction between people who belong to the ﬁrm (insiders) and those who do not (outsiders). most of the variation between insiders is on the intensive margin: at least 70% of our sample CEOs spends at least 15 minutes per week with each of the top ﬁve categories of insiders. The ﬁgure thus provides a lower bound on the working hours of the CEOs. Looking again at the top ﬁve categories by time spent.9. In contrast.7 hours) and the lowest (suppliers: 1.subsidiary. Third.2 CEOs’ Time Use: Insiders vs Outsiders Table 2 and Figure 1 illustrate how CEOs spend their time.4. First. time spent with dierent categories of outsiders exhibit considerable variation on the extensive margin. which focusses on the time the CEO spends with other people. Table 2 (top panel) and Figure 1 show that. CEOs also spend a considerable amount of time with outsiders alone (Figure 1B).are spent in activities that last 15 minutes or longer. for which the diary records detailed information.5 hours) is 1. Our sample CEOs spend on average 15% of their time working alone. 36. time spent with insiders is evenly spread across dierent operational areas (Table 2B). We note that this only comprises the work hours known to the PA. The rest of the analysis will focus on these activities that. On average. The 9 . and the remaining 25% is comprised of phone-calls.6 hours) and the lowest (human resources: 5. 3. The diaries reveal three interesting patterns. CEOs spend 42% of their time with insiders only. Second. There is considerable variation in hours worked: the CEO at the 90th percentile works 20 hours longer than the CEO at the 10th percentile (47 vs 27). CEOs spend most of their time (85%) with other people. 25% with both insiders and outsiders and 16% with outsiders alone. and hours spent with insiders and outsiders. Meetings take up 60% of the working hours.3 hours) is 3.9 -just under 80%. We illustrate how the CEOs allocate their time across dierent categories of people. while insiders are present most of the time. This is of little consequence for our analysis. Of these. consultants dominate among outsiders. as expected. the ratio between the highest (consultants: 4. reassuringly.7 hours over a 5 day-week. We note that this might be subject to measurement error. More interestingly. we note that the average values hide a considerable amount of variation.
time allocation is entirely determined by the ﬁrm’s objectives. The CEO at the 90th percentile devotes 11 weekly hours meeting alone with outsiders.1 Deﬁnitions The CEO faces n activities and allocates non-negative time vector (x1 . which is the particular realization of the theoretical time distribution that we observe in our CEO diaries. 4. and observed time allocation. which is the activity time distribution predicted by the model. The section ends by dealing with the connection between desired time allocation. illustrate that conditional on ﬁrm size and industry. but — in the interest of space and readability — we prefer to illustrate them in the simplest possible linear quadratic formulation. CEOs engage in 27 activities over the observation week. We will show that when these are perfectly aligned. whereas when they are not. The ﬁrm’s production function is Y = n i=1 i xi 10 . The estimated ﬁxed eects. In this case the model will produce a set of testable correlations that can be tested with our data. reported in Figure A1 with their 95% conﬁdence interval. The points we make would still hold in a more general model. We reject the null hypothesis of no systematic dierence.612 activities in the sample and on average. we estimate the time spent with at least one insider at the most disaggregated level of observation in our data . namely that the CEO ﬁxed eects are jointly equal to zero.. To test whether these dierences are systematic rather than the outcome of random variation across CEOs in time input requirement or purely driven by ﬁrm characteristics. The CEO at the 90th percentile devotes 35 weekly hours to activities where there is at least one insider. ..dierences in hours spent with various participants are even starker. industry dummies and CEO ﬁxed eects. CEOs exhibit dierent patterns of time use. xI ) to the activities. at the 1% level. time allocation reﬂects dierence in governance. whereas the corresponding ﬁgure is 14 hours for the CEO at the 10th percentile.conditional on ﬁrm size. 4 A Model of CEO Time Allocation The goal of this section is to develop a minimalistic model of managerial time allocation to illustrate how the interpretation of dierences in time allocation among dierent CEOs depends on the extent to which the CEO’s and the ﬁrm’s interests are aligned.the activity level . We observed a total of 2. whereas the CEO at the 10th percentile spends no time at all with outsiders alone..
then he has to spend more time traveling if he wants to meet the ones in more distant locations). 4. 11 . The total cost of time for the CEO is n 1 2 C= xi . the CEO ﬁrst meets the clients who are willing to come to the ﬁrm or those who work nearby. the CEO only pursues personal interest. the ﬁrm and the CEO have perfectly aligned interests. take the time devoted to having lunch with clients. If b = 1. The parameter b captures the alignment between the ﬁrm’s interests and the CEO’s — implicit or explicit — incentive structure. networking). due either to the onset of boredom or to a lower time-eciency (for instance. If b = 0. the time spent to meet one client equals one hour for the meal plus transportation time.2 Perfect Governance We begin by analyzing the benchmark case where the CEO’s and the ﬁrm’s interests are perfectly aligned The CEO solves max x 6 n i=1 i xi n i=1 n i=1 1 2 xi 2 i=1 n This formulation is equivalent to one where the production function is logarithmic Y R = = i log xi i log xi and the cost function is linear C= n i=1 xi .6 The CEO’s payo is u = bY + (1 b) R C.g. 2 i=1 There is an increasing marginal cost in devoting time to one particular activity. with production function R= n i=1 i xi The vector depends on characteristics of the CEO and the institutional and economic environment he operates in.The vector describes the value of the top manager’s time in all possible activities and it is determined by the ﬁrm technology and environment. The CEO can also produce some personal rent (e.
First. xj ˆ bj + (1 b) j Now. We make two assumptions. Namely. namely k > k kIY kIR 12 . the CEO pursues both the ﬁrm’s interest and her own. with no additional information. Furthermore. As shorthand. Given two activities i and j. However. The solution to the CEO’s maximization problem no longer implies that time is allocated according to the ﬁrm’s needs. 4. we assume that the beneﬁt to the ﬁrm from Y activities is greater in monetary terms than the beneﬁt to the CEO of R activities. To put some structure on the problem. xj ˆ j The proposition makes clear that when the CEO’s interest is perfectly aligned with the ﬁrm’s. The ﬁrst set contains activities that beneﬁt the ﬁrm more than the CEOs (i > i when i IY ). our assumption is satisﬁed when activities can be split into two groups: tasks that only beneﬁt the ﬁrm (i > 0 and i = 0) and tasks that only beneﬁt the CEO (i = 0 and i > 0).” but recall that this deﬁnition should be preceded by “comparatively more”. 1). activities in IY are better for the ﬁrm: if i IY and j IR . we are unable to back out the coecients from the allocations x for a particular CEO. we assume that activities can be grouped into two sets: IY and IR . In particular.3 Imperfect Governance When b (0. given activities i and j. we have: xi ˆ bi + (1 b) i = . the CEO devotes time to activities in proportion to the relative value of the activities to the ﬁrm. the equilibrium allocation of time on the two activities (ˆi and xj ) satisﬁes: x ˆ xi ˆ i = . observing data on time allocation allows us to back out the relative importance of the dierent activities in the eyes of the ﬁrm. we call activities in IY “beneﬁcial to the ﬁrm” and activities in IR “beneﬁcial to the CEO. we can derive a number of cross-sectional ˆ implications that will guide our empirical work. then i > j (otherwise there are activities that are dominated). while the second set contains activities that yield more personal beneﬁt (i < i when i IR ). Second.and the solution is: Proposition 1 In the perfect-alignment case (b = 1).
the cross-sectional correlation between the time xi that the ˆ CEO devotes to a particular activity and the total time the CEO spends at work is positive for activities that are beneﬁcial to the ﬁrm and negative for activities that are beneﬁcial to the CEO. n Corr xk . Let ˆ = b + . Second. Recall that the equilibrium allocation is given by xi = bi +(1 b) i . Recall that ﬁrms dier in terms of governance quality b. That’s because there is more potential beneﬁt to be gained through activities that are beneﬁcial to the ﬁrm. This determines an increase and a decrease in total work time. However. its violation would imply that the CEO job exists mainly for the beneﬁt of the job holder rather than for the ﬁrm. xi > 0 i IY ˆ ˆ k=1 Proof. There is a distribution of ﬁrms that are identical except for the quality of governance. 13 . measure of governance. The covariance ˆ — whose sign is the same as the correlation — is n n Cov xk . the second assumption guarantees that the former eect is strictly larger. noise term. Note that ˆ could be a poor b b proxy. bi + (1 b) i k=1 k=1 = V ar (b) i n k=1 k i n k=1 n k=1 k i n k=1 = V ar (b) (i i ) k k n k=1 k + i n k=1 k which is positive if and only if i > i . xi ˆ ˆ = Cov (bk + (1 b) k ) .This is a weak condition. we can state ˆ Proposition 2 In equilibrium. Firms with a higher b induce the CEO to spend more time on Y -tasks that beneﬁt the ﬁrm (relatively more) and less on R-tasks that beneﬁt the CEO. The intuition behind proposition 2 has to with better discipline.i. so that b is a random variable with support (0.d. b where ˆ is the governance proxy and is an i. they can obtain a higher level of eort than the CEO is willing to put on activities that are directly beneﬁcial to herself. possibly noisy. If the ﬁrm owners are able to translate this into monetary incentives for the CEO. in the sense that the variance of can be very high. suppose we have a. 1). If we observe a distribution of realized time allocations (a vector x for each ﬁrm).
xi = Cov k k n k=1 k xk = ˆ kIY k xk ˆ = Cov k (bk + (1 b) k ) . ¯ The usefulness of the three previous results is that they allow us to identify the ralative value of an activity to the ﬁrm and the CEO. because there exists such that i > ¯ ¯ n n whenever i IY and j IR and hence k=1 k (k k ) k=1 (k k ) 0. we can relate time allocation to ﬁrm productivity Y . 14 . If we do not know a priori which activities are more beneﬁcial to the ﬁrm and which activities are more beneﬁcial to the CEOs. b. ˆ Proof. Finally. Recall that Y = We have ˆ ˆ Cov Y .Unsurprisingly. bi + (1 b) i k n k=1 = V ar (b) i 2 i k n k=1 n k=1 2 i k = V ar (b) (i i ) k (k k ) k k k + i k k k which — again — is positive if and only i > i . ˆ whose sign depends — once more — on whether i is a productive activity. Cov ˆ xi > 0 i IY . b. bi + (1 b) i ) = V ar (b) (i i ) . xi > 0 i IY . the three propositions oer three distinct ways of using time allocation information to distinguish between these. Proof. bi + (1 b) i b2 + (1 b) k k . We have Cov ˆ xi = Cov (b + . In the empirical application we use this framework to shed light on whether time with insiders and outsiders can be divided along these lines. Namely ˆ ˆ Corr Y . better governance is positively related to activities that are more beneﬁcial to the ﬁrm and negatively related to R activities: Proposition 3 The governance measure ˆ is positively correlated with time spent on an b activity if and only that activity is beneﬁcial to the ﬁrm. the cross-sectional correlation between the time xi that the ˆ ˆ is positive if and only if activity i is CEO devotes to an activity i and ﬁrm’s productivity Y beneﬁcial to the ﬁrm. Proposition 4 In equilibrium.
The table reports the p-value of the test of the null hypothesis that the coecient is equal to one. Table 3 estimates the correlations between hours worked and time allocated to insiders and outsiders alone. as the time CEOs must devote to outsiders is likely to be determined by these.5 Evidence on CEOs’ Time Use Guided by the theoretical framework we now explore the correlation between the time use of the CEO and three sets of variables: (i) CEOs’ eort. The analysis will however shed light on the set of assumptions under which the evidence can be made consistent with the two views of the world -perfect vs imperfect governance. whereas the coecient in the corresponding regression for hours spent with outsiders only is negative. whether the ﬁrm is listed and industry dummies (coecients not reported). and signiﬁcantly dierent from one. 5. Our ﬁrst test aims at assessing whether eort -measured by hours worked.with or without outsiders. Panel B shows that the negative correlation between hours worked and hours spent with outsiders alone is driven exclusively by the fact that CEOs who work longer hours devote fewer hours to one-to-one meetings with outsiders alone. hours devoted to insiders increase one to one with hours worked.formalized by the theoretical framework. that is the nature of the data does not allow us to establish causal links. he is more likely to do so when no other ﬁrm employee is present. (ii) ﬁrm governance and (iii) ﬁrm performance. It is key to stress that our analysis only uncovers equilibrium correlations. This follows from the reasonable assumption that if the CEO devotes some of his time to activities that only carry private beneﬁts. We ﬁnd that the coecient in the regression of the logarithm of hours spent with insiders on the logarithm of total hours is not statistically dierent from one.and time use are correlated.1 CEOs’ Time Use and Hours Worked The descriptive evidence in Figure 2 indicates that CEOs dier considerably both in the amount of time they work and in how they allocate this across dierent categories of people. Panel A shows that there is a signiﬁcant correlation between the total time the CEO spends at work and how he allocates this between dierent categories of people. We will discuss these assumptions in detail in Section 6. In particular. Throughout we control for ﬁrm size.namely that hours with insiders (outsiders) increase in direct proportion to the hours worked. Columns 3 to 6 divide the time spent 15 .and time spent with outsiders alone. whereas hours spent with outsiders alone are negatively correlated with total hours worked. Namely do CEOs who work longer hours have a systematically dierent pattern of time allocation between insiders and outsiders? Throughout we focus on the distinction between time spent with at least one insider.
In contrast. whereas a meeting with investors and consultants would fall under the "more than one category of outsiders" heading. The correlation with hours spent with more than one category of outsiders is positive but signiﬁcantly less than one. as well as on the economic cost the CEO pays if the ﬁrm underperforms. In line with the ﬁndings above. they need keep CEOs focused on ﬁrm productivity to preserve their competitive advantage. we proxy quality of governance using ﬁve external ﬁrm level indicators.to meeting outsiders alone. especially in one-to-one meetings. These proxies rely on the intuition that the CEO’s ability to pursue activities that only produce private beneﬁts. Columns 3 and 4 show that the correlation between hours worked and time spent with insiders does not depend on whether these belong to one or more categories. by analyzing the correlation between time use and ﬁve independent proxies of "governance quality". a meeting with investors would fall under the "one category of outsiders" heading. For instance. al (2010) show that multinational ﬁrms are more likely to be well managed and to oer steep performance incentives to their executives. In contrast. Panel C divides the time spent with insiders and outsiders according to the number of people participating in the activity. Column 9 shows that CEOs who work longer hours spend fewer hours in meetings with one or two outsiders and nobody else. we ﬁnd that CEOs who work for multinationals spend more time with insiders and less time with outsiders alone. Since misalignment between the ﬁrm and the CEO objectives is not directly observable. Intuitively. this is consistent with the interpretation that observed variation in time allocation reﬂect dierences in governance. First we use an indicator of whether the ﬁrm is a multinational. In this framework.2 CEO’s Time Use and Governance Findings so far indicate that CEOs who work longer hours devote more time to insiders and less time. Columns 1 and 2 in Table 4 show that CEOs who work for foreign multinationals 16 . In particular. depends on the strength and eective functioning of the ﬁrm board and its ability and willingness to monitor CEO’s actions. In line with this Bloom and Van Reenen (2010) and Bandiera et. Columns 7 and 8 show that the correlation between hours worked and time spent with insiders does not depend on the number of insiders present.with insiders and outsiders into time spent with one or more categories of each. We can test this relationship directly. because of the stronger competitive pressure that multinationals face. 5. governance quality is both the reﬂection of economic incentives and the board’s ability to monitor the CEO. Supporting this idea. Columns 5 and 6 show that CEOs who work longer hours spend fewer hours in meetings alone with one type of outsiders only.in absolute terms. Hence we would expect that CEOs of multinational ﬁrms incur a higher cost if they divert time from productive to unproductive uses. To the extent that CEOs whose ﬁrms have better governance work harder.
in contrast. But we observe some of their characteristics. whether the CEO is external to the family or one of its members. As a third proxy for quality of governance we use an indicator for whether there is at least a woman in the board. The second indicator is the size of the board. There is evidence that the presence of women improves the quality of governance. 1992). Columns 7 and 8 show that CEOs with larger boards spend less time with insiders and more time with outsiders alone. Lipton and Lorsch. Family CEOs. to raise board 17 . In addition. We have no direct information on the nature of the directors. Columns 3 and 4 in Table 4 show that external CEOs who work for family ﬁrms spend 32% more time with insiders and 27% less time with outsiders alone. and if so. there is no separation of ownership and control and hence no governance issues as such. The next set of indicators proxies for the power of ﬁrm owners vis-à-vis the CEO. family CEOs in family ﬁrms might pursue objectives other than proﬁt maximization (Bandiera et al 2010) and the implication of these for time allocation is not captured by our simple framework. Time allocation in Italian multinationals is similar and we cannot reject the null that the coecients are equal. for instance because coordination among owners is much easier when owners are few.spend 54% more time with insiders and 55% less with outsiders alone. Jensen (1993). This distinction is key because it raises dierent governance issues.47 of a percentage point. Both coecients are precisely estimated at conventional levels. including gender. but only the former is estimated precisely. subscribing to this criticism argues that "‘when boards get beyond seven or eight people they are less likely to function eectively and are easier for the CEO to control". The ﬁrst indicator in this set measures whether the ﬁrm is owned by a family. compared to disperse shareholders. Compared to disperse shareholders. This is in line with the intuition that. A 1% percentage point increase in board size reduces the time spent with insiders by 0. do not appear to behave dierently than CEOs in non family ﬁrms. Yermack. thus granting CEOs more discretion which can be abused (e.24 of a percentage point while it increases the time spent with outsiders alone by 0. For instance.g. When the CEO belongs to the family. Consistent with this views there is some evidence that larger boards reduce the value of the ﬁrm (e.g. pletoric boards can be just the reﬂection of attempts to bring in friends and transfer them shareholders money through board members compensation. Large boards have long been suspected of being dysfunctional and to provide too little criticism of management performance. 1996). family owners can keep a tighter control on their CEOs. In line with this. A better measure of constraints on the CEO is the independence of board members. however. family owners face fewer diculties in monitoring the CEOs they hire to run their ﬁrms. Adams and Ferreira (2009) ﬁnd that boards with more women tend to be tougher with the CEO.
respectively when at least one woman on the board has an executive role. (2010)). al (2003) ) and are less self-oriented then men (for instance Eagly and Crowley (1986). as well as the ﬁndings in the previous section. The ﬁndings in columns 11 and 12. we test whether the time the CEO spends One rational is that women have higher standards of morality and a higher sense of their duty as documented in experimental and survey based studies which show that women are more likely to stick to the rules. Butler et.attendance and to monitor more. and that dierences in time allocation reﬂect dierences in governance. al. decreases hours spent with insiders by 13% and increases hours spent with outsiders alone by 45%. 7 18 . less likely to break agreed legal or moral norms (e. Guiso et. As a ﬁnal and more direct measure of governance quality and restraints on the managers we use the country-level indicator of private beneﬁts of control computed by Dyck and Zingales (2004) on the basis of block control transactions in 39 countries. Reiss and Mitra (1998). better monitoring. We attach this measure of quality of governance to multinational ﬁrms in our sample on the basis of their country of origin and rely on within variation among multinational ﬁrms operating in Italy.either because of stronger market competition. the ﬁndings in Table 4 provide a coherent picture.7 Throughout the analysis. The next section looks at whether dierences in time allocation have any implication for ﬁrm performance. table 4. suggests that the evidence is consistent with the idea that time with outsiders alone yields more private beneﬁts than time with insiders. Compared to the others. As expected. more powerful boards. the main advantages of this measure are its direct interpretability in terms of access to private beneﬁts and its exogeneity. 5. It comes at the cost that we can only rely on a subset of observations. indicate that CEOs who work for multinationals based in countries with better governance spend more time with insiders and less with outsiders alone. The ﬁndings in columns 9 and 10 indicate that CEOs spend 17% more time with insiders and 27% less with outsiders alone. we distinguish between executive and non executive roles. A one standard deviation increase in the index. Taken together.g. Eckel and Grossman (1998). This. since we expect this eect to be stronger when women assume executive roles. the correlations have a similar sign but are smaller in magnitude and not precisely estimated when we look at the presence of women with non executive roles. Following the theory. indicating a worsening of governance. thus providing more monitoring and control. Because of this they are more willing to voice in the board meetings against a shirking CEO. Whenever the CEO and the ﬁrm interest are better aligned .3 CEOs’ Time Use and Firm Performance For our next test we match the time use data with external measures of ﬁrm performance from the Amadeus database.CEOs spend more time with insiders and less time with outsiders alone.
The results indicate that however this is not the case. precisely estimated and not signiﬁcantly dierent from zero regardless of where the activity takes place. To allay this concern. The coecient is precisely estimated but small and not signiﬁcantly dierent from zero. We address this concern using information on whether the activity was scheduled in advance and recorded in the CEO’s diary. As illustrated by the model in Section 3.23 percentage points increase in productivity. the PA might have more precise information on the hours dedicated to a given activity if this takes place in the CEO’s oce. activities that are planned in advance and already recorded should be measured 19 . rather than on activities that take place away from the ﬁrm. we would expect the time spent with outsiders at HQ to be positively correlated with ﬁrm productivity. Our main measure of performance is productivity. while he might meet outsiders in other locations.14 percentage point increase in productivity. Alternatively. the time devoted to these activities should not be correlated to ﬁrm performance.with dierent categories of people is correlated with ﬁrm performance. which is available for 80 of our 94 sample ﬁrms. measured as the value of sales over employees. The test of equality of coecients between hours with at least one insiders and hours with outsiders alone rejects the null at the 1% level. The coecient is precisely estimated and implies that a one percentage point increase in CEOs’ working hours is associated with a 2. on the other hand. Column 1 shows a strong positive correlation between hours worked and productivity. Column 2 shows that this correlation is entirely driven by the hours the CEOs spend with at least one other employee of the ﬁrm. In particular. which is presumably close to hers. given that the CEO generally meets insiders at the ﬁrm’s HQ. Column 3 splits the hours spent with outsiders alone according to location. Intuitively. A one percentage point increase in hours spent with at least one insider is associated with a 1. Firms in the ﬁnance sector are excluded from this exercise because sales/employees is not a comparable measure of productivity in this sector. In contrast. namely the CEOs’ time is an input in the production function. Columns 3 to 5 address measurement error issues. the CEO spends time on activities that beneﬁt him but not the ﬁrm. If. Table 5 estimates the conditional correlation between ﬁrm performance and CEOs’ time use controlling for ﬁrm size and industry dummies. the results could be driven by measurement error if the time spent with outsiders comprises unproductive travel or setting-up time. The coecient on hours spent with outsiders is small. If this were driving the results. hours spent with outsiders alone are not correlated with productivity. most interestingly. A related concern is that the PA might have more precise information about the duration of activities with insiders and hence measurement error would again introduce a downward bias on the coecient on time with outsiders alone. hours spent working alone and. all hours devoted to productive activities should be positively correlated with ﬁrm performance.
governance proxies and the performance of the ﬁrm he leads. As illustrated in the theoretical framework. whereas time spent with outsiders alone is not. while time spent with insiders shows a positive correlation. time spent with outsiders is negatively correlated with three-year sales growth. variations in time use can either be seen as optimal responses to dierent circumstances faced by dierent ﬁrms if the CEO’s ad the ﬁrm’s interests are perfectly aligned (b = 1) or as consequences of dierences in the quality of 20 . A possible further concern is that the impact of time allocation choices might reveal itself over a longer time period. In contrast. In fact. Column 6 presents the conditional correlation between ﬁrms proﬁts per employee and time use. In particular we ﬁnd that CEOs who work longer hours spend more time in activities that involve at least one insider and less time in activities where the CEO meets outsiders alone. To test this idea we consider as a dependent variable the growth rate of sales over a three year period. namely capital and materials. Columns 4 and 5 show that this form of measurement error was not driving the results either. To assess the empirical relevance of this interpretation.so to leave the ﬁrm owners indifferent between having a hard working CEO who spends long hours with insiders and a CEO who works fewer hours and spends more time with outsiders alone. The results in column 7 do not support the idea that time spent with outsiders might have a positive long run impact.most notably the CEOs pay . time spent with insiders is positively correlated with productivity and proﬁts. For example. it might also be correlated with other unobservables . CEOs who work for ﬁrms with stronger governance also spend more time in activities that involve at least one insider and less time in activities where the CEO meets outsiders alone Finally. networking activities might need a longer time frame to bear their positive impact on ﬁrm performance. The coecient of hours spent with outsiders is small. whereas time spent with outsiders is not. although the coecients are not precisely estimated. precisely estimated and not signiﬁcantly dierent from zero regardless of whether the activity was planned in advance. While the pattern of time use is correlated with productivity. the coecient on hours spent with at least one insider is positive and signiﬁcantly dierent from zero regardless of whether the activity was planned in advance. The results show that time spent with at least one insider is positively correlated with proﬁts. Column 5 probes the robustness of the results to the inclusion of other inputs.more precisely. 6 Discussion and Conclusions The analysis above has illustrated a rich set of correlations between the CEOs’ pattern of time use. his eort.
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