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About the author: Maryam Firoozi is an Assistant Professor in Accounting at the Sprott School of Business.

I have dedicated a significant part of my research to understand how geographic distance between different stakeholders in business can impact decision-making and performance. And, what has been evident in this area of research is that physical proximity matters. Whether it is a board member who lives far from the company they work for, or an investor who lives far from the company they have invested in—both scenarios reveal that the closer the proximity of people to the business, the better the outcomes in job performance, decision-making, and quality outputs.i,ii,iii,iv As the world adjusts to and processes the vast changes occurring to our social realities due to the COVID-19 pandemic, now more than ever, we recognize how physical distancing has become an important indicator and consideration in the survival of businesses and our personal lives.

Why Does Physical Proximity Matter?

Physical proximity matters because it is directly related to how much information people have access to when it comes to decision making. The closer the proximity, the more access to information. But, what’s also important to consider is what type of information is being shared. For example, in this digital, information-technology era, quantitative information such as sales revenues and other important financial data is very accessible and easily shared among stakeholders alike. Emails, websites, newsletters, and even social media can be effective tools to disseminate information with various stakeholders. In the COVID-19 era, using technology effectively is critical to continue to get timely and vital information out via these channels.

However, there is the type of information that isn’t as easy to measure and transfer virtually and it is where businesses and stakeholders are feeling the impact of physical distancing: information that is tacit and hard to quantify; the information we gather only from being face-to-face. For example, when an investor meets an entrepreneur, or executives meet in a board room, all parties can gain a lot of tacit information about each other, such as honesty, understanding, and satisfaction, simply by interacting and observing. When people are physically closer, they have access to body language, facial expressions, even auditory cues that can be missing in the virtual world.v

The pandemic has had a huge effect on the landscape of business in numerous ways. For one, many businesses have had to deploy a work-from-home model for many of their employees, essentially overnight. As employees, managers, auditors, creditors, and other stakeholders work remotely, they have less access to tacit information to make their decisions and to perform their duties. For example, as the universities adjusted to the COVID-19 lockdown, I found myself having to modify my way of teaching as I switched from in-class to an online platform—a virtual classroom where my students were accessible only through a screen. In this new form of teaching, I found it difficult at times to evaluate how my students were doing during our classes. During my in-person class setting, when a student asked a question, I could look at their face and read their body language, and this would tell me a lot about their understanding of the class material. I could recognize gaps and gain cues on how to adjust my teaching. Conversely, virtual classrooms make tacit cues particularly difficult to assess. I now must create other quantifiable measures to ensure my students are following the subject material, understanding the content, and are staying engaged.

Information sharing with customers, creditors, auditors, and employees, likewise, is at a critical precipice, so it is essential that it is handled well. Since physical-distancing mandates triggered by the pandemic have made access to tacit and soft information difficult, it has become essential that businesses and organizations rely heavily on quantifiable and transferable information to help in the decision-making process. This has been demonstrated in studies looking at board of directors’ proximity to the companies they work for: When board members live far (such as a different city) from the company they govern, they rely mainly on stock price of the company to evaluate the performance of their CEO. This is because frequent in-person interactions (to gain tacit information) isn’t It is extremely important for businesses to have a decent measurement and reporting system in place. The information needs to be to the point, easily readable, and concise. Although access to information improves the decision-making process, too much of it can create information overload. It is prudent, therefore, for businesses to have consideration for and forethought into information sharing. Moreover, it is important to provide information that is up to date: timely access to reliable information is critical to make informed decisions.

During these challenging times, where physical distancing is the new societal norm—personally and in business, we need to rethink how we do business effectively while continuing to stay connected. Working together and being proximate, even from a distance, is important—now more than ever.

[i] Alam, Z. S., Chen, M. A., Ciccotello, C. S., & Ryan Jr, H. E. (2018). Board structure mandates: Consequences for director location and financial reporting. Management Science64(10), 4735-4754.
[ii] Firoozi, M., Magnan, M., & Fortin, S. (2019). Does proximity to corporate headquarters enhance directors’ monitoring effectiveness? A look at financial reporting quality. Corporate Governance: An international review27(2), 98-119.
[iii] Ayers, B. C., Ramalingegowda, S., & Yeung, P. E. (2011). Hometown advantage: The effects of monitoring institution location on financial reporting discretion. Journal of Accounting and Economics52(1), 41-61.
[iv] Chhaochharia, V., Kumar, A., & Niessen-Ruenzi, A. (2012). Local investors and corporate governance. Journal of Accounting and Economics54(1), 42-67.
[v] Petersen M. (2004). Information: hard and soft. Working paper, Northwestern University, Evanston, IL.
[vi] Alam, Z. S., Chen, M. A., Ciccotello, C. S., & Ryan, H. E. (2014). Does the location of directors matter? Information acquisition and board decisions. Journal of Financial and Quantitative Analysis49(1), 131-164.

Tuesday, June 2, 2020 in , ,
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