What the CEO’s choice of sport says about their attitude to risk

There have been many attempts over the years to explain why CEOs are leading their companies into situations that many outside observers would question. While officially key decisions are the responsibility of the entire board, there is no doubt that CEOs are willing to hold power – as a result, the corporate landscape is littered with ill-considered mergers and acquisitions, over-ambitious strategies, aggressive sales and marketing campaigns and the like.

Commentators often identify two main types of CEOs: the expansionist, visionary type, which often comes from marketing experience, and the more stable, number-focused individual, usually associated with financial experience. They often alternate as investors switch between a desire for vision and a preference for caution. But what if the attitude to risk has less to do with learning and background, and more to do with character and general behavior? As early as 2019, Robert Davidson, Ayesha Day and Abby Smith published a study that suggested a link between the way CEOs behave outside of work and attitudes towards risk and other aspects of the culture in the business they manage. Now another team of researchers has noticed a link that can help ensure that those who hire senior executives have a better idea of ​​the likely future behavior of successful candidates. In an article published in a recent issue of Journal of the American Tax Association, Shuqing Luo, Terry Shevlin, Luring She and Aimee Shih suggest that CEOs are more likely to engage in aggressive tax planning if they engage in high-risk sports. This seems like a very specific problem, but researchers point to academic work in psychology, which shows that individuals’ sports activities reflect their tolerance or appetite for risk and suggest that while their focus has been on taxes because they are accounting scholars, the findings have wider implications.

Terry Chevlin, a professor at the Paul Menage School of Business at the University of California, Irvine, said in a recent interview that while he wasn’t sure the candidate’s sporting preferences would be a “red flag” for recruits, he felt it was helpful. building a picture of the individual. He added that it was “quite a simple thing” for boards or even auditors to ask the question to assess the risk tolerance of managers.

Chevlin agrees that some would say that high-risk sports, such as skiing or rock climbing, are undertaken by certain types of people because they can afford to participate or have access to the right places. But he insists that the methodology allows this and the fact that the research is based on information about sports interests revealed by individuals themselves. In total, the team identified about 20 sports and ranked them according to the level of participation (golf, not surprisingly, the most popular) and according to injury risk data for each. Researchers also noted that in some cases, interest may include viewing rather than actual participation.

In the article, Chevlin and colleagues say they “expect people to develop specific sports interests based on their personal risk preferences after exchanging the benefits of participating in sports with potential risks of injury.” According to them, tax planning is a useful measure, as “the company’s tax aggressiveness is a unique and strategic decision made by its top management, where such a decision is the result of trade-offs between costs and benefits.” They add: “On the one hand, companies can generate significant tax savings by taking aggressive tax positions by structuring business transactions in the gray areas of tax laws or operating in low-tax regimes that can test the limits of tax compliance; on the other hand, aggressive tax positions can expose firms to compliance uncertainties and tax risks, including regulatory fines, sanctions and reputational risk. After all, managers’ risk preferences are likely to play a significant role in trade-offs. “

Researchers say the study highlights the differences between decisions driven by individuals’ “innate preferences” and those driven by incentives when companies want CEOs to behave in a riskier way. As such, they say, the findings could ultimately lead to more informed corporate decisions. For example, boards of directors seeking senior management positions may ask interviewees about their sports hobbies, as this can help identify their degree of reluctance to take risks. Banks and lenders could directly ask the company’s top managers about their sports hobbies to help assess the risk associated with lending to client companies. Financial analysts and institutional investors could also ask senior management about their sporting activities to help assess management’s risk preferences and assess the impact of those risk preferences on management’s tax planning decisions.

Leave a Comment

Your email address will not be published.