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The celebrity effect

The magical effect of putting a famous face on a company's board

Mar 30th 2010 | From The Economist online

IN MARCH 1998 the Coca-Cola Bottling Company announced the appointment of a most unlikely new director to its board: Evander Holyfield, a former heavyweight boxing champion (pictured above), best-known for having part of his ear bitten off in a bout by a fellow boxer, Mike Tyson. He was not the only top athlete at the time with a seat in the boardroom: Michael Jordan, a celebrated basketball player, was a director of Oakley, a sunglasses manufacturer. Other sports stars to try their hand at directing corporate America in the past 25 years include Billie Jean King, a tennis player appointed to the board of Altria (then called Philip Morris) in 1999 and Nancy Lopez, a golfer, who became a director of J.M. Smucker, a jam-maker, in 2006.

Boards have also recruited from the ranks of Hollywood. Disney appointed Sidney Poitier to its board in 1994, for example. Deepak Chopra, an author and lifestyle guru, was recruited to the board of Men’s Wearhouse, a suit retailer, in 2004. Stretching the definition of celebrity a bit, General “Stormin’” Norman Schwarzkopf was appointed a director by the Home Shopping Network in 1996. And you can take your pick from scores of politicians-turned-directors, including Al Gore, a former vice-president and a member of Apple’s board since 2003.

Gerald Ford was a particularly enthusiastic collector of boardroom seats after he left the White House. While on the board of American Express he stunned his fellow directors by asking Harvey Golub, the chief executive at the time, to explain the difference between “equity” and “revenue”, according to Vicky Ward’s new book on Lehman Brothers, “The Devil’s Casino”. This was perhaps not so surprising for a man Lyndon Johnson once said had “played too much football with his helmet off”. But it prompts a broader thought about why companies recruit celebrity directors.

Michael Eisner, the boss of Disney when Mr Poitier joined the board, may have been right to say that the actor’s “talent is more than screen deep,” and that his “election to our board brings us not only his exhaustive knowledge of the entertainment industry but the judgment and wisdom of an exceptional man.” Even so, it would seem a reasonable assumption that the lack of business nous displayed by the late President Ford is more typical of the celebrity in the boardroom. So what is the point of having them?

Because they increase the value of the firms whose boards they join, apparently. According to “Reaching for the Stars: The Appointment of Celebrities to Corporate Boards”, a new study by four American-based economists, simply announcing that a celebrity is joining a board gives the company’s share price a boost. Disney’s share price jumped by 4.2% on the day Mr Poitier was appointed. But, for the more than 700 celebrity director appointments (out of over 70,000 board appointments in all) that the study examines during 1985-2006, the firms’ shares continued to outperform significantly over the subsequent one, two and three years.

Why is this? In some cases—a former president, say—powerful connections and the ability to open the right doors were surely a factor. And, as Mr Eisner claimed of Mr Poitier, some celebrities may bring relevant experience (the study muddies the waters somewhat by including several famous business people, such as Rupert Murdoch and Martha Stewart, within its definition of celebrity). On average, the study found a bigger impact on share prices when celebrity directors had “related” experience than when they had none. Yet “unrelated” celebrity directors had a bigger impact on share prices than unrelated non-celebrities.

To explain this, the economists point to the “visibility effect”—that appointing a celebrity helps draw the attention of investors to a company which, all else being equal, increases demand for its shares and thus its share price. Certainly, a celebrity director seems to increase the proportion of a firm’s shares bought by institutional investors (whom the economists think are especially prone to the visibility effect both directly and as a result of the greater attention paid by stockmarket analysts).

So, should companies respond to this study by picking a few directors at random from the pages of People magazine, or beating a path to Brangelina Towers? It might work, at least for a while. On the other hand, surely sooner or later investors will realise that if the appointment of a director who has nothing to offer but a famous name boosts a firm’s share price, it delivers a damning verdict on the value of the rest of the board. Rather than a reason to cheer, perhaps the celebrity effect on companies’ shares should be seen instead as an indicator that boards are failing to do their job properly and that they contribute little in return for their generous pay. Or indeed that professional investors, who ought to know better, are as starstruck as the readers of gossip magazines.