Do Chief Executives’ Traits Affect the Financial Performance of Risk‐trading Firms? Evidence from the UK Insurance Industry
| Published date | 01 July 2017 |
| Date | 01 July 2017 |
| Author | Mike Adams,Wei Jiang |
| DOI | http://doi.org/10.1111/1467-8551.12222 |
British Journal of Management, Vol. 28, 481–501 (2017)
DOI: 10.1111/1467-8551.12222
Do Chief Executives’ Traits Aect the
Financial Performance of Risk-trading
Firms? Evidence from the UK Insurance
Industry
Mike Adams and Wei Jiang1
School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK, and 1Manchester Business
School, University of Manchester, Booth Street West, Manchester M15 6PB, UK
Corresponding author email: m.b.adams@bath.ac.uk
Weexamine the eects of four key dimensions of Chief ExecutiveOcers’ (CEOs’) traits
on six financial performance metrics using panel data for 1999−2012 drawn from the
UK’s property−casualty insuranceindustry. We find that CEO insurance experienceand
CEO financial expertise enhance financial performance, while two other CEO traits −
power and age −are generally not significant. Our results thus reinforce the importance
of CEO insurance industry expertise and CEO financial expertise in the management
and trading of risks. Our results have potential commercial and policy implications.
Introduction
Nowhere are financial performance indicators so
central to corporate governance and the realiza-
tion of strategic activities than in firms engaged in
the trading, bearing and management of extreme
risks such as those operating in the insurance in-
dustry (Landier et al., 2012). Insurance is a highly
specialized and technically complex commercial
activity (e.g. in terms of risk selection and pricing)
that protects the consumers of insurance (the
policyholders) from contractually contingent eco-
nomic losses through the eective diversification
of assumed risks and returns on invested assets
(Knights and Vurdubakis, 1993). Another distin-
guishing feature of insurance is that, in contrast to
other industries, the management of risk and un-
certainty impacts directly on policyholders as the
We acknowledge the help and support of Jill Atkins,
Maggie Chen, Elisabeth Dedman, Terry Hayday, Vineet
Upreti, Elena Veprauskaite and Andy Stark during var-
ious points in our research on corporate governance in
insurance firms. However, the usual disclaimer applies.
value of their future financial claims is dependent
on the strength and condition of the insurance
provider (Desai, 2014). As a result, insurers are
archetypal risk-bearing/risk-trading enterprises
whose financial model involves managing balance
sheet assets and liabilities through the matchingof
cash inflows from written premiums and income
from well-diversified investment portfolios with
cash outflows on settled claims and business
expenses (Starita and Malafronte, 2014).
In developed insurance markets, such as the
UK, insurers operate within a stringent statutory
and regulatory framework that is designed to
maintain financial resilience and protect the fixed
contractual claims of policyholders (Gaa and
Krinsky, 1988). Additionally, since the 1980s
the international insurance industry has been
subject to increased product-market competi-
tion, increased scrutiny by the public media and
heightened financial constraints (Knights and
Willmott, 1993). Moreover, board-level financial
expertise has become particularly pertinent in
insurance firms since the UK’s Financial Services
and Markets Act (2000) and the greater degree of
© 2017 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
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482 M. Adams and W. Jiang
statutory compliance that it imposed, including
regulatory approval of senior executive appoint-
ments (Dewing and Russell, 2008). Together these
institutional factors necessitate that the Chief
Executive Ocers (CEOs) of insurance firms
are proficient in the technical and governance
aspects of risk and insurance, and have sucient
firm-related knowledge and financial management
acumen to make strategic decisions that maximize
firm value within the confines of regulation and
market competition. These considerations could
increase the need for the CEOs of insurance firms
to use their discretion and influence in initiating
and directing strategic decisions.
In this study, we used a longitudinal panel
data set (1999−2012) drawn from the UK
property−casualty insurance industry to test
the eects of four key dimensions of CEOs’
characteristics – functional autonomy (power),
age, insurance industry experience and financial
expertise1−on six commonly used financial
performance metrics: the net profit margin, return
on assets, return on equity, solvency (leverage),
loss ratio and combined operating ratio.2Using
an ordinary least squares (OLS) model and a
propensity score matching approach, we find that
CEO insurance experience and CEO financial ex-
pertise enhance financial performance. However,
the results for two other CEO traits – power and
age – are generally not significant. Our results thus
reinforce the importance of a CEO’s insurance and
financial expertise in the eective management
and trading of insurable risks.
We contribute to the literature in at least three
main ways. First, potential tensions between the
1Theconceptofpower−defined by Combs et al. (2007)
as the ability of the lead executive to influence and dom-
inate others −is particularly important in analysing firm
performance as CEOs tend to haveconsiderable influence
over resource allocation decisions, the budgetary process
and the approval of publishedaccounting statements.
2Superior financial performance is captured by largerval-
ues for the net profit margin, return on assets and re-
turn on equity, and smaller values for the solvency ratio,
loss ratio and combined operating ratio. These account-
ing ratio based measures are commonly used in studies of
the corporate governance−performance relation as they
relate the abilities of the CEO and the board to eec-
tively utilize resources (e.g. assets and equity capital) for
maximum return. Moreover, our six accounting indica-
tors are more appropriate in the context of the present
study than market-based performance measures (e.g. the
earnings per share or price−earnings ratio) as most UK
insurers are not major public exchange traded entities.
strategic decisions of the CEO and the views of
board-level subordinates in insurance firms pro-
vide an interesting context within which to exam-
ine the financial outcomes associated with CEOs’
traits and the moderating influence of board-level
and firm-related variables. Forexample, in idiosyn-
cratic and information asymmetrical insurance
firms, professional financial status may not only
confer ‘expertise’ and ‘prestige’ power on CEOs
but concomitantly impose reciprocal ties and
obligations on them −such as to share financial
information with others who aremembers of other
professional bodies (Greenwood, Suddaby and
Hinings, 2002).3The ‘expertise’ and ‘prestige’
dimensions of a CEO’s power profile could
ameliorate rather than reinforce the potential
abuse of structural power that the CEO has over
other board members, and so promote a positive
rather than a negative impact on the financial
performance of insurance firms. This notion thus
provides a new theoretical angle on the optimality
of board structure and the nature of strategiclead-
ership in insurance and other industries where the
management of extreme risk is a key board-level
function.
Second, the observations of many prior studies
of the CEO−performance relation in publicly
listed companies (e.g. Serfling, 2014) could be con-
founded by inherent business and economic risk
variations due to industry eects and dierences in
regulation and accounting practices. In contrast,
the greater firm-level/time-series variation in our
single industry sample of UK insurance firms (e.g.
in terms of size, organizational form and owner-
ship structure) helps to reduce cross-sectional and
firm selection (Miller and Yang, 2015). Indeed,
O’Sullivan and Diacon (2003) consider that the
3We classify a CEO as a financial expertif he/she has for-
mal and legitimated professional accountancy, actuarial
or insurance underwriting qualifications. Professional fi-
nancial associations define and constitute relevanttechni-
cal knowledge, devise calculative frames and devices, and
signal credibility to users of financial statementsand other
audiences in the economy and society. Our definition of
financial expert is thus more precise than that of the US
Sarbanes−Oxley (SOX)Act (2002), which adopts a broad
definition of financial expert thatincludes board members
that hold/have held senior executive positions (e.g. Chief
Operating Ocers) and/or individuals whomay have a ‘fi-
nancial label’but no formal financial qualifications. CEOs
who are members of other financial bodies (e.g.Chartered
Financial Analysts) were not observed from our panel
sample of insurance firms.
© 2017 British Academy of Management.
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