Corporate leadership attracts enormous attention, both from scholars and from the public. Yet, despite this strong interest, very little is known on what activities leaders engage in. Most texts that purport to define and explain the role of corporate leaders are based on a small amount of evidence, often just a single case. What is widely considered the authority in this area, John P Kotter’s (1999) classic, “What Leaders Really Do?,” is based on recording the activities of 15 general managers of non-randomly selected companies for 35 hours each. Obviously, no general conculsions can be drawn such small samples. Needless to say, time constraints are of critical importance for people at the top of organisation hierarchies. Information processing (e.g. Van Zandt 1998), communication (Bolton and Dewatripont 1994), and problem solving (Garicano 2000) all compete for managerial time, and time available, particularly at the top of the organisation, is quickly exhausted. Two key questions arise. How do managers allocate their time? And do they act so as to maximise firm performance or their own individual objectives?
To fill the gap, we have developed a methodology to collect and analyse information on how CEOs of top companies use their work time. We create a time-use diary for CEOs and we use it to record how a sample of 94 CEOs belonging to leading Italian companies in various industries allocate their time over a pre-selected work week.
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 has a good understanding of the functions of the people with whom the CEO interacts (Badowski 2004). The PA reports overall working time and records in a diary all the activities of the CEO that last longer that 15 minutes, detailing in particular information on other participants.
Activities are grouped 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. Outsiders are grouped in categories CEOs normally interact with, for instance suppliers, investors, or consultants. The insider/outsider classification is a crucial one in corporate leadership. First, it captures the essence of the CEO's job: "The CEO is the link between the Inside that is the organisation, and the Outside of society, economy, technology, markets, and customers" (Drucker, cited in Lafley 2009). Second, it is a dimension in which the CEO's and the firm's interests might be misaligned.
As a matter of fact, the optimal inside/outside balance is the subject of controversy in the management, finance, and economics literature. At one end of the spectrum, a widely held view is that since the CEO is the "public face" of the company, spending time outside the firm is an important (if perhaps not the most important) role of the CEO. At the other end, however, an increasingly popular view points out that time spent with outsiders might mostly benefit the CEO without contributing to creating value for the firm. Khurana (2002), for instance, argues that CEOs have strong incentives to seek visibility, by cultivating personal connections with influential business leaders. In line with this, Malmendier and Tate (2009) show that when their power vis-à-vis the firm increases, CEOs spend more time outside the firm in activities, such as writing books and playing golf, and that this shift in activities does not contribute to a firm's performance.
Our data reveals that, as expected, CEOs spend the majority of their time with other people (85%). Of these most are employees of the same firm, but many are not. On average, CEOs spend 42% of their time with insiders only, 25% with both insiders and outsiders and 16% with outsiders alone. More interestingly, these averages hide a great deal of heterogeneity, both in terms of number of hours worked and time allocation. A majority of CEOs spend very little time (less than 5 hours per week) alone with outsiders, but over 10% of them spend over 10 hours a week. What explains the wide heterogeneity in the allocation of time?
To answer this question 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. Suppose the CEO chooses how much time to devote to a number of possible work-related activities, or to leisure. Each of the work activities yield non-negative benefits to the firm and to the CEO. For instance, networking with clients might increase the firm's sale but also increase the chance that the CEO is offered a better job in the future. We divide activities into the ones that benefit mostly the firm and those that benefit mostly the CEO. In this set-up, the interpretation of differences 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. When the CEO's and the firm's interests are not perfectly aligned, time allocation is determined by both the firm's objectives and the CEO's objectives. The observed variation in time allocation partially reflects differences in the quality of governance that determines the alignment of the CEO's interests with the firm's. Such a model makes the following predictions:
- CEOs who work longer hours devote more time to activities that mostly benefit the firm and less time to activities that mostly yield private benefits.
- 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.
- 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.
Note that no assumption has been made as to which activities are relatively more beneficial to the firm or its CEO. This will be determined by time-use information, linked to other firm-specific data.
On the first prediction we find that the insider/outsider allocation is associated with systematic differences in CEO work time (Figure 1). In particular, CEOs who work longer hours spend more time with insiders and less time, in absolute terms, with outsiders, especially in one-on-one meetings.
Figure 1. Effort
Second, the insider/outsider allocation is systematically correlated with differences in firm governance. More precisely, we correlate CEOs time allocation with a range of external proxies for firm level governance: ownership, board size, gender representation, country of incorporation (there are a number of non-Italian multinationals in our sample). In all four cases, 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. Figure 2 depicts the relationship between time use and board size, a classical measure of governance.
Figure 2. Governance
Finally, we show that the insider/outsider allocation is correlated with firm performance (Figure 3). Time spent with insiders is positively correlated with several measures of firm performance, while time spent with only outsiders is not. For example, a 1% increase in hours dedicated to insiders is correlated with a productivity increase of 1.22%, whereas a 1% increase in hours dedicated to outsiders is correlated with a productivity increase of 0.22%, and both effects are significantly different from zero at conventional levels.
Taken together, our findings suggest that differences in time allocation reflect differences in governance and that, compared to time spent with outsiders alone, time spent with insiders is more beneficial to the firm.
Figure 3. Productivity
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