Trump popularity signals desire for change

  • By James McCusker
  • Wednesday, August 19, 2015 2:54pm
  • Business

It sounds like one of those confounding questions on a standardized test: What do charter schools and Donald Trump have in common? The answer is that their current popularity comes primarily from what they are not, not from what they are.

Charter schools in our state have endured years of voter rejection, union opposition, self-created problems, bureaucratic harassment, and mediocre performance assessments…all with undiminished enthusiasm. Why? Because they are not the public schools.

Donald Trump, 69, has enjoyed successes and endured failures in his real estate development career, and he was able to leverage the successes into considerable personal wealth as well as hosting several reality-TV shows. His decision to join an already crowded field and run for President as a Republican provided the first of his two surprises. The second was that his complaints about the current state of our country’s affairs catapulted him almost immediately into first place among the candidates for the nomination. Why? Because he was not a politician — specifically, he was not a Washington, D.C. politician.

The longer-term outlook for the fate of either charter schools or candidate Trump is far from certain, but they both illustrate the depth of discontent and discomfort that exists with things as they are today. There is a strong desire for change.

We should add the workplace to that list. Sluggish economic expansion, stagnant wages, extremely competitive internal and external environments, and rapidly changing technology have affected workers to the point where many of them are looking to corporate leadership to change things and boost worker confidence as well as productivity.

Some recent research sheds light on how we make judgments about individual leadership. “Perceptions and price: Evidence from CEO presentations at IPO roadshows,” by Elizabeth Blankespoor, Bradley E. Hendricks, and Gregory S. Miller, reveals how our judgments about leadership qualities affect our assessments of a firm’s prospects.

One of the report’s authors, Gregory S. Miller, is a professor at the University of Michigan’s Ross School of Business and has a special interest in financial communications. He says, “Our intent was to discover how much the market pricing model was affected by evaluation of management that potential investors derived from the presentations that CEOs made.”

The IPO pricing model is data-driven, with past financial performance records mated to forecasts and estimates of market size and competition. The competence of CEOs is assessed not through first-hand impressions but through resumes of their education and experience.

CEOs of companies seeking initial public offerings (IPOs) of stock usually make presentations to investors around the country. These “roadshow” presentations are routinely recorded on video and, although longer, they are not unlike those given by entrepreneurs on the television program “Shark Tank.” The big difference is that the financial data — the basis of the traditional pricing model — is more extensive and formatted in a standardized way due to the federally regulated, public nature of the offering.

In the study itself, 224 CEO presentations were boiled down to three 10-second clips, minus their sound tracks —“Vid-bytes,” really. These were shown to a randomly selected audience whose impressions of CEO attractiveness, competence, and trustworthiness were recorded, compiled into a composite index, and compared with the actual price of the IPO.

What the authors found was a game-changer. The data-based IPO pricing model traditionally used by analysts and economists was incomplete. Firms with CEOs that made favorable impressions were, as the report summarizes, “…more likely to be matched to high-quality underwriters,” an important factor in market price. The report also states that, “…instinctive impressions of management are incorporated into investors’ assessments of firm value.”

“Roadshows” by CEOs and management teams are frequently criticized as being expensive, time-consuming, and inconsequential when it comes to IPO success — criticism remarkably similar to what analysts say about televised debates for candidates. As the most recent campaign demonstrates, though, the debates can be very consequential, just as roadshows are an important factor in investors’ assessment of CEOs.

There are obvious differences between individuals and institutions, and we make our judgments about them in different ways. There is a big distinction, for example, between selecting a political leader and selecting the type of school to educate our children; and an equally big difference between IPO valuations and assessments of workplace management. What these four areas have in common today are the need and the preference for change over constancy, and for genuine leadership.

Data, is important but in the end so are our judgments and decisions about a leader’s ability to change things for the better and meet the challenges of the future. And the more we know about how our decisions are made — in education, politics, workplaces, and financial markets — the better off we will be.

James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.

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