CEO Power and Nonconforming Reference Group Selection

Abstract

Research shows that reference group selection underpins critical organizational processes, but less is known about publicly disclosed choices of reference groups, such as those for the evaluation of firm performance. Because audiences, such as investors and analysts, prefer reference groups created by independent entities they can trust, they disapprove of choices of custom peer groups created by reporting firms. Nevertheless, firms frequently choose reference groups that do not conform to audiences’ expectations. We seek to explain why firms deviate from these externally held standards even when incurring penalties by developing theory and formulating hypotheses about the influence of chief executive officer (CEO) power. Using data from 10-K filings, we find that firms led by high-power CEOs are more likely to use nonconforming, custom peer groups despite incurring penalties. However, the relationship between CEO power and the use of custom peer groups is weaker when CEOs face greater scrutiny from shareholders and analysts. We also find that low firm performance increases the use of custom peer groups among high-power CEOs. Contrary to our expectations, high CEO compensation attenuates the effect of CEO power on the choice of custom peer groups, arguably because high levels of CEO pay increase scrutiny. Although firms incur costs for using nonconforming reference groups, supplemental analyses reveal that CEOs benefit by receiving higher compensation, especially when performance is low. We conclude by discussing implications for research on publicly disclosed reference groups, the consequences of power, and information disclosure.

Who's in the Driver's Seat? Exploring Firm-Level vs. CEO-Level Effects on Problemistic Search

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Who depends on why: Toward an endogenous, purpose‐driven mechanism in organizations' reference selection

“…The comparison with references, therefore, reflects a “diagnosis” or “self‐assessment” mechanism in which comparisons with similar references help a firm better assess its own abilities and standing in the market. Prior work conceptually mentions such self‐assessment mechanisms (Greve, 1998) as well as other purposes in association with reference selection (e.g., Audia et al, 2021; Porac et al, 1999).…”

Aspiration formation and attention rules

“…Selecting a suitable comparison peer group is also an important issue in the BTOF (Audia et al, 2021). When we queried the compliance consultant about how her clients benchmarked waste levels, she noted that firms assess “…how they're doing compared to other companies in their same industry.…”

“…“Reappraisal of goals…appears to be a constant problem in an unstable environment” (Thompson & McEwen, 1958, p. 24) because it is difficult to make sense of and learn from a volatile environment. For example, volatility obfuscates the selection of an appropriate reference group and the observation of rival actions driving performance outcomes—a requirement for deriving social aspirations (Audia, Rousseau, & Brion, 2021).…”