What nearly 80,000 earnings calls reveal about executive leadership

When Vincent Forlenza, then-COO of medical technology manufacturer Becton Dickinson, prompted EVP Gary Cohen to comment during a quarterly earnings call in February 2011, the exchange was nothing out of the ordinary for a Fortune 500 company. 

Responding to a question from a JPMorgan analyst regarding the company’s long-term growth strategy, Forlenza answered with his own insights before inviting Cohen to give his perspective, according to a call transcript. Less than six months later, Forlenza would be named as the company’s new CEO, and as Chairman of the Board the following year.

Coordination and communication like this among CEOs, boards, and other executives are increasingly critical but difficult to observe directly. New research from Wei Cai, Assistant Professor of Business at Columbia Business School, analyzed 78,512 conference call transcripts from 2010 to 2020. Her paper’s findings show that executive cooperation, or an executive’s tendency to initiate collaboration in pursuit of collective benefit, may be the reason why a leader is eventually promoted to CEO.

"In modern companies, in modern societies, leadership is increasingly team-based. It's not just one person, but a group of people leading the team," Cai told CBS Insights. “So, coordination and communication become more and more important.”

Cai and her co-researchers, Professors Ethan Rouen and Yuan Zou of Harvard, and Kunlu Ju also found that markets react more positively to announcements of cooperative CEOs compared with non-cooperative ones. 

While Cai emphasized that the findings are correlative and not causal, she noted that "the market seems to interpret a cooperative leader as a positive signal about a firm's organizational effectiveness and value creation.” 

Analyzing 1 Million Conversations

The researchers’ sample included approximately 1,030,000 instances where at least two people responded to an analyst's question on a quarterly earnings call. They focused exclusively on the unscripted Q&A sessions where analysts ask executives tough questions because they provided the necessary setting to observe internal dynamics and interactions among executives, according to Cai.

Using an algorithm, the researchers identified approximately 130,000 specific cooperative interactions where one executive invited a colleague to speak, by name, and provide more detail to an answer—a practice that Cai refers to as “passing the mic.” Each executive was scored based on how often they initiated these interactions compared to how much they spoke overall.

These conference calls provided a rare window into the internal dynamics and communication styles of a leadership team, according to Cai. She noted that, unlike laboratory experiments where the risks are low, earnings calls are high-stakes, real-world environments where an executive’s reputation and the company's stock price are on the line. By using transcripts, the researchers were able to study over 10,000 executives at thousands of different publicly traded companies.

Creating Value Through Cooperation

In addition to their findings that cooperative executives are, on average, more likely to be promoted to CEO, the researchers found that markets react positively to announcements of cooperative CEOs. Appointing a CEO who is more cooperative than their predecessor is associated with an average three-day abnormal return of 0.6%.

Cai and her co-researchers documented a large increase in abnormal return volatility and trading volume on the actual announcement date. That seems to confirm that the information is a meaningful surprise to investors. In other words, the market doesn’t price in these appointments.

"The market seems to interpret a cooperative leader as a positive signal about a firm's organizational effectiveness and value creation,” Cai said. 

Cooperativeness represents a leader's ability to mobilize talents and get an entire executive team to work together toward a collective benefit, she noted, since this sort of behavior is often a trait linked to pro-social actions, such as charitable involvement. And investors likely view the "passing the mic" behavior as a sign of genuine engagement.

Cai noted that the market may also anticipate a "learning channel," where a cooperative CEO's behavior encourages the rest of the executive team to become more cooperative. When a firm appoints a CEO who is more cooperative than their predecessor, the rest of the executive team significantly increases their own level of cooperativeness in the following year.

This suggests that while a bad culture can prevent a cooperative leader from rising, a cooperative leader, once in power, has the potential to mobilize talent and foster a more collaborative environment across the C-suite, Cai said.

Cultural Constraints

While the benefits of executive cooperation can be great, its impact is not universal, according to Cai. That’s because the impact of cooperativeness is contingent on organizational culture. 

In firms where teamwork culture is at least modestly present, cooperative executives are more likely to be promoted. But in organizations with very low emphasis on teamwork, cooperativeness is not valued and yields no significant promotion advantage, Cai said.  

Cooperative executives are not penalized at such organizations, however. In these low-teamwork environments, the statistical link between cooperative behavior and promotion becomes insignificant. Cai and her co-researchers described this as an "internal friction" that can thwart the career advancement of cooperative executives if their personal style does not align with the firm's established norms. 

On the other hand, Cai said, cooperativeness is found to be most beneficial in knowledge-intensive or technology-focused firms where cross-disciplinary collaboration is paramount.