Chicago - Jul. 26, 2017
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Psychopath CEOs Destroy Value

Some enterprising manager ought to look into a Long Nice CEOs/Short Jerks hedge fund.

A new UK study finds that companies with leaders who show "psychopathic characteristics" destroy shareholder value, tending to have poor future returns on equity.

This, coming just a year after a study finding better operating results at companies with nice leaders, suggests there may be a viable investment strategy in buying the one and betting against the other.

Let's talk about the bad apples first; they are always so much more interesting.

Psychopathy is a disorder characterized by antisocial actions, excessive risk-taking, egotism and a lack of empathy and remorse. Sound like any successful CEOs you know?

The UK study doesn't seek to identify psychopaths per se, but, examining senior management and company characteristics as a whole, uses a series of markers which the authors believe are highly correlated with there being psychopaths in control.

"For four out of the five proxies (for psychopathy) considered the relationship with returns [as] statistically significant. Such results imply that managerial psychopathic behavior is an ominous sign of shareholder wealth destruction," Tomasz Wisniewski of the University of Leicester, and Liafisu Yekini and Ayman Omar of Coventry University write.

The study measures the extent to which company annual reports use words which are aggressive, use self-absorbed language or show a tendency to blame others, all traits they theorize reveal psychopathic tendencies. As psychopaths break rules, they also measure how often companies are caught out in accounting troubles. As they are thrill seekers, the study looks at a measure of idiosyncratic company risk, and as psychopaths lack empathy, the study looks at corporate charitable donations.

The upshot is though psychopaths may have some advantage in climbing the corporate ladder, once at the top they do shareholders no favors. Having psychopaths in the executive suite now points to poor returns in a year's time, according to the study.

Psychopathic behavior in the executive suite may not be a small or isolated problem. A 2011 study of Australian white-collar managers found that 5.76 percent could be classed psychopathic and another 10.42 percent dysfunctional with psychopathic characteristics.

"Overall, the reading of the literature reveals that the concentration of psychopaths tends to be particularly high in prisons and boardrooms," the authors write.

NICE PEOPLE DO FINISH FIRST

All of this accords well with the study last year from academics at Harvard, the University of Chicago and Stanford, which found that CEOs who score well for "agreeableness" are associated with companies which show better operating results.

Nice people, it seems, have a hard time getting ahead but do good work for those who employ them when they do.

That study looked at the language executives used in conference calls with analysts, which being unscripted are perhaps more revealing, and then mapped them to the five major personality traits of agreeableness, neuroticism, conscientiousness, extraversion and openness.

In terms of who gets to be a CEO it is not surprising that the group showed low levels of neuroticism, which is associated with emotional instability, anxiety and hostility.

While the mean scores for the other four traits were all more than three times higher than for neuroticism, it is striking that agreeableness was the fourth highest, with conscientiousness the highest. In other words, among personality trait holders only fretful neurotics are less likely to find themselves in the C-suite than nice people.

"There is a robust negative association between extraversion and return on assets and cash flow. Similarly, openness is negatively associated with profitability," Ian Gow of Harvard University, Steven Kaplan and Anastasia Zakolyukina of the University of Chicago and David Larcker of Stanford University write.

As for agreeable CEOs, they tend to spend less on R&D but have far and away the strongest positive correlation to return on assets, both in current and future terms. Earlier research has posited that agreeable CEOs do well by encouraging cooperation and less hierarchical structures and cultures. While that might make a company less "results-orientated" it also might make it better able to make good medium- and long-term investment decisions.

Less agreeable CEOs are more likely to be found at firms which are innovative and take on more risk via the use of borrowed money. In part, we may be seeing an illustration of the truism that a small growing company needs a different kind of leader than an established one.

A remorseless psychopath is no one's idea of a good leader, while having nice people in charge is not simply a matter of preference.

Investors, and companies, should work harder to weed out the one and promote the other.

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Comments welcome.



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Posted on June 26, 2017


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