Do Businesses Benefit When Leaders Live Locally?

In the pre-pandemic period, various studies highlighted the benefits of having employees living close to their place of work. Indeed, some employers went to the lengths of paying people extra if they lived within a certain distance of their workplace.

The rationale behind such efforts was to cut down on the commute people undergo each day, and therefore make people happier, less stressed, and hopefully more productive. It's tempting to assume that as Covid lifted the lid on the value of remote working that this logic might not be so strong, but a recent study from INSEAD suggests that companies can benefit when their bosses live in the same neighborhood as the workplace.

Neighborhood CEOs

Perhaps with the allure of remote working in mind, the research focuses less on the value proximity provides in terms of productivity, and more in terms of its impact on the culture of the organization.

"In this paper, we focus on neighborhood CEOs, i.e. CEOs with an affinity toward the local community, and establish how they shape workplace conditions," the researchers explain.

Culture is something nearly all organizations are striving to improve, with most executives confident that doing so will improve the bottom line of the business. It perhaps goes without saying that CEOs have a significant role in shaping the culture of their organization, but perhaps few would reason that their home address would play much of a role.

Local community

The researchers define so-called neighborhood CEOs as those who have a strong affinity with their local community. They examine the impact living close to the office has not only on the work environment but also on performance and profitability.

They focused their attention on Denmark, and looked at data from the Danish Working Environment Authority (WEA) covering over 70,000 Danish firms between 2008 and 2015. This data was used to help gauge the work environment.

They then augmented this with a couple of surveys that looked at how workers felt about their workplace, as well as how their leaders handled various workplace issues. Last, but not least, they gathered the address of the headquarters for each firm, and of the CEOs themselves to build a neighborhood proximity measure for each firm. This last measure was itself augmented by an additional survey targeting tens of thousands of CEOs to gauge their affinity with their neighborhood and to understand how this impacted their leadership.

Location matters

The results suggest that location has a big role to play in the success of firms, as those companies whose leaders live within 5km of the workplace seem to be better companies to work for.

This finding was reaffirmed by the survey results, which underlined the correlation between the location of the CEOs and the culture of their organization, with those bosses living close to the office overseeing companies with fairer and more inclusive workplaces that gave employees greater input into workplace decisions.

"Going beyond the measure of geographic proximity, our survey evidence has shown that firms led by CEOs with a more local mindset are less likely to be hit by administrative remarks," the researchers explain. "Moreover, employees of such firms are generally more satisfied about the environment where they work, they consider their firms to be more caring of individuals with special needs (e.g. elders), and are less worried about work-related conflicts."

The researchers believe that closer proximity to their workplace seems to chime with a greater appreciation for employee welfare. They suggest this could be heightened due to the shared existence bosses have when they live in the same neighborhood as their employees. This gives more opportunities to develop social bonds as there is a greater likelihood of bumping into one another outside of the workplace.

"We documented that one key channel through which neighborhood affects working environment is the set of social interactions between CEO and employees: the firm’s working environment is better when CEOs and employees live close to each other and/or have children attending the same schools," they explain.

This then has a knock-on effect on the productivity, and therefore the profitability, of the firms themselves, with companies with better cultures around 4% more productive.

Hybrid workplaces

Obviously, the pandemic has forced a rethink of just what the workplace means and whether we need to be physically based at work in order to be effective. While the researchers accept the benefits of remote working, they believe that their findings underline one of the benefits of living and working in close physical proximity to one another.

As with so much, there will inevitably be trade-offs to be had from the numerous benefits employees gain from working remotely and the cultural benefits proximity provides, but given the oft-stated challenges in developing workplace cultures during lockdowns, it's perhaps something to consider.

In the meantime, it's a timely reminder of the clear links between employee welfare and shareholder returns, and will hopefully reinforce the fact that investing time and money into employee welfare should not be viewed as a cost but rather an investment.