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By Sheryl Nance-Nash
What's in a name? More than you might think, says a study of the effect of the announcement of celebrity appointments to corporate boards. But there's reason to take the findings with a grain of salt.
According to the research, which was published earlier this month by the University of Missouri and examined the stock market's reaction to the appointment of nearly 800 celebrities to boards of U.S. public corporations, preliminary results show positive returns greatly in excess of expectations.
The authors, Steve Ferris, a professor of finance at the University of Missouri, Robert J. Trulaske, Sr., College of Business, along with researchers from SUNY Buffalo, St. John's University and the University of Nebraska, concluded that the market reacts to the prestige and status the appointments bring, generating greater visibility for the company.
Although the researchers found that the appointment of popular business CEOs and entrepreneurs was common and accounted for nearly 30 percent of their sample, the large number of politicians, such as Gerald Ford, Condoleezza Rice, Evan Bayh, Robert Gates, Andrew Young and Donald Rumsfeld, accounted for almost a quarter of their sample. The appointment of celebrities as directors occurs most often in the manufacturing, transportation and communication sectors.
"It seems that the market focuses more on the celebrity's name recognition than any real business experience he or she might have," Ferris said in a prepared statement.
The researchers also examined whether or not this effect was temporary. They investigated the long-term effect of celebrity directors, examining company stock return performance up to three years following the celebrity's initial appointment. Regardless of whether the celebrity had related business experience, the appointing companies still enjoyed superior long-term performance.
The researchers found that analysts revise their earnings more frequently for companies after the appointment of celebrities to the board, suggesting that analysts find these companies more interesting to follow. Also, the number of institutional owners and the level of their investment in these companies increased after the celebrity appointment.
"Celebrities increase a company's visibility in such a way that it becomes more prominent to the investment community, which is good for the company and its shareholders," Ferris said.
Some experts say the effect is understandable. "Investors are spending more time researching the companies where they place their hard-earned dollars. Part of this research includes the names, affiliations and backgrounds of board members; and the bigger the name, the larger the interest," said Rhonda Weiss, a consultant and instructor at UCLA.
Weiss noted that more celebrities have been recruited for boards following corporate scandals like those at Enron and WorldCom, where directors' qualifications came into question. This led many CEOs to become more selective about the types and number of boards they would serve on, in turn forcing companies to widen the scope of their board searches.
But not everyone buys the study's conclusions. John Holcomb, a professor at the University of Denver Daniels College of Business, says that celebrities may be attracted to already successful companies, citing the case of Al Gore and Apple. "Often it is boards of only major and usually successfully companies, which are able to attract big names or celebrities," said Holcolmb. "It may not be celebrities on boards that lead to success, but vice versa - only successful companies attract celebrities," said Holcomb.
And if celebrities have some special magic, he adds, it doesn't always work, citing the huge scandal at Hollinger International, whose board was led by Conrad Black and included Henry Kissinger, former Defense Secretary William Cohen and former Democratic Party chair Robert Strauss. "That board was a debacle, and did not contain any of Lord Black's misbehavior and outright theft from the company," said Holcomb. "The suspicion is that most board meetings were lofty discussions of macro issues, virtually salons, which never got down to business."
Then too, said Holcomb, having celebrities on the board can actually backfire in terms of publicity or even legal exposure in cases of a corporate collapse or scandal. "The company looks even more foolish with such names on the board. It raises questions about the ego of the CEO populating the board with such figures, perhaps ignoring their skill sets. Further, the company invites more scrutiny by regulators and investors with such big names on the board. As in life, it's better for boards to stick to professionals and select purely by merit."
While celebrities bring recognition to a company, some experts think companies are better off limiting their association to endorsements unless their experience is relevant to the business. "I don't think much extends beyond their celebrity unless they have some special expertise that is applicable to the product or service that the company provides," said Wayne Rogers, of Wayne Rogers & Co, an investment strategy and management firm. Rogers played Dr. Trapper John McIntyre on Mash and is chairman of the board of Kleinfeld and a board member of Vishay International.
A celebrity athlete may provide horsepower to a producer of sports clothing or equipment. But that same sports celebrity would most likely fail to add value to an energy company, said Dennis Condon, a partner with the law firm of Blank Rome.
"Modern governance principles require boards to be actively involved in a company's strategic plan, management oversight, compliance, critical business decisions and proper disclosure," said Condon. "Unless a celebrity brings expertise in these areas, it doesn't make sense for the celebrity to be a board member."
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