Legacy more important than the enterprise

12 May 2015 19:54

(updated: 21 March 2016 19:56)

When the possibility of being knighted no longer existed, we saw that the firms practised a much tighter employment policy.

Konrad Raff

Legacy more important than the enterprise

Titles such as "Sir" or "Dame" are so alluring for CEOs that they willingly sacrifice corporate profits.

Konrad Raff, Financial Researcher at The Norwegian School of Economics (NHH), has written a research paper that has created quite a furore on the other side of the globe.

The paper "Knighthoods, Damehoods and CEO behaviour" takes a closer look at the biggest companies in New Zealand.

Top managers' legacies

Since 1848, the country has had a scheme with titular honours that are awarded by the government, which entitle the recipient to use the title "Sir" or "Dame". Such honours are considered to be very prestigious and are awarded to candidates who, in one way or another, have had a special impact on society. Among the recipients are a number of corporate leaders.

The scheme was abolished in 2000, but was reinstated by the Conservative government in 2009.

"For an econometrician this is a dream situation. This is a natural experiment that has given us the opportunity to examine the effect of accolades", Konrad Raff tells NHH Bulletin.

Less focus on profits

Raff and co-author Linus Siming wanted to find out if the possibility of being awarded a fancy title made CEOs attach less importance to fulfilling the investors' desire for profits at the expense of others considerations.

And the findings do indeed indicate that the knighthood scheme has a definite impact on top managers' decisions, for example with regard to employment.

"When the possibility of being knighted no longer existed, we saw that the firms practised a much tighter employment policy", said Raff.

Impact in a number of different fields

This applied only to CEOs with New Zealand citizenship. Knighthoods cannot be awarded to foreign CEOs who manage New Zealand companies. These, therefore, constitute the control group in the study.

Compared with the control group, the researchers observed 21 per cent reduction in employment after the knighthood scheme was abolished. They also found increased profit margins and improved productivity after abolition.

"Our findings are compatible with the idea that there was a certain degree of 'over employment' before the knighthood scheme was abolished", said Raff.


The Department of Finance researcher is of the opinion that there are grounds for believing that the conclusions are also valid outside New Zealand. His colleague, Linus Siming, for example, carried out similar studies on official honours in Sweden, which were abolished in the 1970s.

Siming found that in Sweden, honours were "a part of" the salary package for CEOs, because almost all bosses were awarded such an honour. When the scheme was abolished, the CEOs' financial compensation rose.

"It looks as though people care about such awards", said Raff.

Shrugged off as nonsensical

The new article has received quite a lot of media attention, not least in New Zealand. A New Zealand newspaper picked up the story and confronted business leaders with the findings. Not surprisingly, the bosses were quick to reject them.

"One CEO said it was nonsense that he would down-prioritise corporate profits. But in the same breath he said that he was focused on 'the overall interest of the company', which can mean just about anything", said Raff.

Another business leader received his honour partly because he had ensured that corporate purchases came from local producers.

"Then one can ask: If he is willing to change the procurement strategy, what about the other decisions he has to take?"

Can help the left

The knighthood scheme can thus be thought to be detrimental to investors' returns, but in return beneficial for workers.

"People on the left seem sceptical of such honours, and regard them as a little old-fashioned and elitist. We found, however, that this kind of a scheme can actually help achieve goals that have typically been the goals of the political left. For example, honours are one possible tool to protect workers' rights", said Raff.

He emphasises that it may be that the scheme, overall, creates inefficiencies, so that the "total pie" ends up smaller than it might otherwise have been. But it is difficult to quantify the effects and say which of them dominate.

"If the employment effects of these kinds of honours are as big as you have found them to be, does that mean that the Conservative Party has a 'secret weapon' to increase employment? Taking it to the extreme, we could even say that it resembles vote buying."

"Indeed. We in no way claim that that is the case, but it is consistent with our findings", says Konrad Raff.


Knighthoods, Damehoods and CEO Behaviour is written by Linus Siming of Bocconi University - Department of Finance and Konrad Raff of Norwegian School of Economics.

For some of the newspaper articles about Raff's paper on knighthoods, see The Telegraph and Financial Times.

Text: Olav Slettebø