Volkswagen has agreed to pay almost US$15 billion (S$20 billion) in the US for cheating on its emissions tests; but beyond the hefty fines, firms which are embroiled in such trust-violation situations – big names like Enron and Worldcom; and closer home, institutions like National Kidney Foundation, City Harvest church and the 1MDB - have the urgent task of proactively restoring their damaged reputation.
One important tactic in repairing trust is to replace the CEO, as he is the look-to person for reshaping organisation values. My team and I asked two questions: Firstly, how is something as abstract as a person’s integrity assessed? Secondly, how do you measure if the CEO replacement has been successful in building lost trust?
As a substantial amount of research has demonstrated the importance of appearance, we studied the effect of facial stereotyping of successor CEOs of companies that were restating after corporate fraud versus those that were not.
The fWHR, or facial width-to-height ratio is an objective facial structure measure that has been associated with leadership characteristics such as general trustworthiness. fWHR is the ratio of the width between the two cheekbones to the distance between the upper lip and mid eyebrow.
A number of studies have demonstrated strong links between fWHR and perceptions based on certain facial characteristics. For instance, men with a higher fWHR ratio – or simplistically, wider faces - are deemed to be more dominant and have been linked to leading more financially successful firms; while men with a lower fWHR ratio - or narrower faces - are deemed less likely to cheat or exploit others’ trust.
We tapped archival studies of firms that have announced financial restatements from 2003 to 2006 as the result of aggressive accounting practices, misuse of facts, oversight of accounting rules, and misrepresentation; and obtained photos of their CEOs from company websites and Google Images.
We used a matched-pair sampling design for comparing the different effects of fWHR. Each restating firm was matched with a with a non-restating firm – that is, a firm that appointed a successor CEO for reasons other than trust violations and which has similar characteristics such as being in the same industry and of similar size.
Our studies of 352 restating firms and their matched non-restating firms showed that firms that replaced CEOs following integrity-based trust violations were more likely to name individuals with a smaller fWHR ratio that is CEOs with a narrower face, which has the effect of conveying greater integrity.
By contrast, when the successor CEO was selected under normal non-trust related circumstances, boards were more likely to select leaders who appear more dominant - as signalled by wider faces - as it is believed their more aggressive nature is more able to lead the firm to better performance.
The important question for shareholders was – were these CEO replacements successful in building up lost trust? Does facial structure really have an effect?
We looked at the two important groups of external observers – investment analysts and media - with the ability to powerfully shape perceptions, and thus increase or mitigate reputational damage.
To gauge investment analysts’ reactions, we measured the difference in the earnings-per-share (EPS) forecast made by analysts immediately prior to the successor announcement and immediately after. The difference was stark. An increase in successor CEO fWHR, that is a wider-face-CEO denoting dominance, not integrity - caused an increase of $1.92 in EPS forecast for the matched firms; but saw a decrease of $1.08 for the restated firms, a difference of $3.00 per share for a firm recovering from trust issues.
We analysed media reactions two days prior to the announcement of the successor to two days after and found that the media responded less negatively to the appointment of leaders who conveyed greater integrity through their facial appearance. Again, quantitative values showed a decrease of more than 100 percent in negative media coverage for the restated firms when the successor CEO facial structure denoted greater integrity.
The evidence of impact on analysts, media, and fundamentally, the bottom line highlights that when firms have to proactively restore their damaged reputation following trust violations, boards have to go beyond assessing competence-related factors when picking the next CEO. They have to also be sensitive to the impact of easily observable characteristics that can signal integrity or lack of it.
However, we are not advocating that boards start attending solely to facial structure when confronted with CEO selection following misconduct. Rather, we want to draw attention to the importance of managing perceptions of integrity in mitigating reputation damage. Perceptions of integrity can be increased through actions as well. For example, CEOs hired following financial misconduct could signal their integrity by creating independent committees within the firm that focus on financial transparency.
Our research also highlights our subconscious dependence on facial stereotyping, which may not be accurate. An applicant’s face may signal integrity but he may not actually be effective at leading the organisation to high performance. Boards need to be aware of these biases and need to exercise considerations of more valid cues such as the applicant’s track and integrity record in previous positions.
Aspiring CEOs need to be aware of the reliance by important stakeholders on facial cues. In addition to paying attention to their resumes, they need to also manage their physical presentation; or more overtly present evidence of their integrity or capabilities. In the same vein, executive search firms may do well to coach CEO candidates with wider facial structures to signal their trustworthiness for firms selecting CEOs after firm misconduct, or those with narrower facial structures to signal their competence.
About the author
David Gomulya is an assistant professor of strategy, management and organisation at Nanyang Business School, NTU Singapore. This research was conducted with
- Elaine Wong, University of California, Riverside
- Margaret Ormiston, George Washington University
- Warren Boeker, University of Washington, Seattle
This commentary was published in The Business Times on 4 May 2017.