The COVID-19 pandemic triggered an unprecedented financial turmoil. From 24 February 2020 to 20 March 2020, the market valuation of U.S. companies plummeted markedly, exceeding the downturn seen during the economic crisis of 2008-2009.
At the pandemic’s beginning, various CEOs discussed topics beyond immediate business concerns during their conference calls with financial analysts, highlighting their empathy for affected individuals. This behaviour is at the heart of a new study by researchers from the University of Zurich, the London School of Economics and Political Science, and Cambridge Judge Business School.
The study examined 510 conference calls involving 448 major U.S. corporations during the pandemic. It found that slightly over half (51.8%) of the CEOs expressed concern for people during these discussions. However, most of these expressions were deemed superficial and needed actionable commitments. Nonetheless, firms with CEOs who recognized the human aspects of the pandemic demonstrated superior stock performance compared to those whose leaders did not.
The unexpected influence of superficial empathy
Lauren Howe, the study’s primary author, recounts her experience analyzing call transcripts from May 2020, during which she noticed CEOs voicing their concerns for the health and safety of employees, customers, and others impacted by the virus. While such statements seem irrelevant to financial analysts, they influence investor sentiments significantly, especially during a crisis like COVID-19. Despite these statements’ generic nature and lack of associated actions, the study surprisingly revealed that they positively impacted stock prices during the market downturn.
Each additional statement of human concern was correlated with a 2.49 percentage point increase in cumulative returns. Considering the median market equity value of the analyzed companies was about $3.17 billion, this correlation translated into an approximate financial preservation of $78.9 million per company amidst the crisis.
Leadership encompasses both performance and empathy.
Further analyses linked these human-centric statements to reduced stock volatility during the crisis, although they did not correlate with analysts’ future earnings predictions. This reduction in volatility suggests that market participants viewed these stocks as less risky when CEOs demonstrated empathy. Remarkably, these generic expressions of concern resonate with investors despite their lack of financial relevance.
The findings highlight the importance of CEOs displaying humanity in their communications, affecting investor perception and company performance. By focusing exclusively on performance metrics, CEOs miss the opportunity to show the empathy expected of them. “Leadership is about both performance and people,” states Jochen Menges, the study’s last author. “Our research confirms that showing care for individuals pays dividends, even in settings like conference calls with analysts and investors, who typically concentrate on performance.”
During the pandemic, CEO expressions of empathy included poignant acknowledgements of the human cost:
“I mean, first of all, any time people are sick or tragically lose their lives, that’s a much more important topic than anything we’re covering today. So, I just want to sort of put a fine point on that.” – Strauss H. Zelnick, CEO of Take-Two Interactive Software, Inc.
“First off, the whole coronavirus situation is a human situation. It’s kind of a human tragedy.” – Andrew Anagnost, CEO of Autodesk, Inc.
“Obviously, the coronavirus makes a very fluid situation. […] I’ll start by saying, our first priority is making sure that our employees, partners, and customers are safe.” – Anders Gustafsson, CEO of Zebra Technologies.
More information: Lauren Howe et al, CEOs Showing Humanity: Human Care Statements in Conference Calls and Stock Market Performance during Crisis, Academy of Management Discoveries. DOI: 10.5465/amd.2021.0225
Journal information: Academy of Management Discoveries Provided by University of Zurich