Greed’s the Same Color Green as Money

Yes, you’re right, Canadian money comes in more colors than just green, but you get where I was going with the cliché in the title, I hope. Now, when reading the last issue of my favorite weekly magazine, “Maclean’s,” on April 23, 2007, I stumbled upon the results of an interesting study. The authors this study claim that a company’s market performance drops significantly once top executives start buying or building expensive real estate.

If you’re interested in reading up on the study, it was conducted by David Yermack of New York University and Crocker Liu of Arizona State University. They pulled together and compared a survey of 488 CEOs running companies included in the S&P 500 Index.

In specific dollar-versus-percentage terms, if an executive buys a home to the tune of more than US$3.0 million, his company’s stock shaves off on average 3.4% in comparison to companies the executives of which choose to live in less flashy abodes. And, the more grandiose the real estate, the greater the performance discrepancy, all the way to 6.9%.

Now, initially I thought, “What does CEOs buying expensive mansions have to do with the price of something or other in China?” But then the study’s authors got me thinking. How exactly are those people buying million-dollar homes? Sure, they’re well- paid and, come year end, if it was a good year, the size of their bonuses is directly related to the size of their companies’ earnings. Still, homes that cost well over $3.0 million dollars, some being built from scratch, some over 10,000 square feet big?

As it turned out, to buy such homes, the Big Kahunas utilized one tool more than any other, which was selling their companies’ shares. That was the case with 32% of the surveyed head executives. Also the case was that companies the executives of which sold their shares offered even poorer performance than companies with bosses who did not sell.

In lieu of explanation or excuse, head executives commented that buying expensive homes is more a sign of commitment to the company than anything else. Basically, once you buy an expensive home, you need the job to pay for the upkeep.

On the other hand, the study’s authors argued that acquiring status symbols is more a sign of complete and utter job complacency (read “laziness”). That reasoning goes more along these lines: “I’m an important person. I don’t have to prove anything to anyone in the business world anymore. But darn it, my next-door neighbor has no clue how much money I make!” Or so I imagine that inner- conversation would go.

My take on it is that using stock options and bonuses to buy real estate puts the companies’ executives in sort of a precarious position. I don’t find it to be much of a sign of commitment to the firm, and even less as an indication of complacency. Rather, I find it to be like a stone around their necks.

This is because, as long as head honchos haul in expected earnings, their compensation will be at a certain level. But, what happens when the stars align against them? Will they lie, cheat, and steal to keep those earnings up, along with their lavish lifestyles? Or will they account for their companies’ performances honestly and downsize, if need be? I honestly don’t see the latter happening.

So, my two cents concerning this study is that certain actions of executives running public companies are beyond privacy issues. If and when you learn that a company’s CEO is upgrading his/her living arrangements and selling the company’s shares to pay for the privilege, run! Digging out the information does not require driving around affluent neighborhoods. All you have to do is watch mandatory reporting of legal insider selling. And if they’re selling, abandon ship!