Thursday, January 12, 2012

Why Narcissistic CEOs Kill Their Companies




Fifteen years ago, I met Don Hambrick at Columbia BusinessSchool, who is probably the world’s expert in the field of studying CEOs, top management teams, and boards.  I was lucky to become his doctoral student.
Don’s now the Evan Pugh Professor, Smeal Chaired Professor ofManagement at the Smeal College of Business at Penn State.
A few years ago, Don decided to explore through a rigorous academic study just how damaging Narcissistic CEOs can be.  It turns out they can be amazingly damaging – to the point of, in some cases, eventually killing their companies.
Don just completed a follow-up study that offers even more clarity on the problems they cause.
Why study Narcissistic CEOs?

Besides the fact that we know lots of them exist out there today in business, Don explains it this way:
[O]rganizational researchers may not believe that executive narcissism is of much theoretical or practical significance.  They may see executive narcissism as incidental to organizational functioning – annoying to those who must endure it, grist for jokes about self-absorbed CEOs, but little more.  However, narcissism in the executive suite can be expected to have effects on substantive organizational outcomes, potentially including strategic grandiosity and submissive top management teams.  Narcissism can affect an executive’s choices in such areas as strategy, structure, and staffing.
Although we throw around the term narcissism easily, there’s been extensive study of the topic by psychologists over the years.  Hambrick, going from the psychological literature, defines a narcissist as someone showing the following four personality characteristics:
(1) Exploitativeness/Entitlement –> I insist upon getting the respect that is due to me;
(2) Leadership/Authority –> I like to be the center of attention;
(3) Superiority/Arrogance –> I am better than others; and
(4) Self-absorption/Self-admiration –> I am preoccupied with how extraordinary and special I am.
One of the key challenges Don faced in studying this topic is that it’s hard to approach a corporate CEO who you believe to be a narcissist and ask him to fill out a personality questionnaire to see how narcissistic he is.  You don’t get past his assistant with that request.  So, anyone studying the topic has to find unobtrusive ways at assessing how narcissistic someone actually is.
Luckily, Don’s a smart and creative guy.
Here’s a summary of what Don found in both studies with his co-author Arijit Chatterjee:
-  In the first study, the authors studied 111 CEOs in the computer and software industries between 1992 and 2004.  Coincidentally, I can think of a number of Narcissistic CEOs from the world of tech in recent years includingMeg Whitman, Carly Fiorina, Eric Schmidt, and John Chambers. (I’ll say more later about why I don’t think Steve Jobs was a Narcissistic CEO in the way that was defined in this study.)
- They created a 4 measure index of CEO narcissism which were:
·         The prominence (size) of the CEO’s photo in the annual report
·         CEO prominence (number of mentions) in company press releases
·         CEO’s use of first person singular pronouns in transcripts of public comments to shareholders
·         The gap between the CEO pay (salary, bonus, deferred income, stock grants, and stock options) and the pay of the 2nd highest paid executive
- The study showed that more narcissistic CEOs spent more on advertising as a percentage of their sales, spent more on R&D as a percentage of their sales, ran up costs more (measured as SG&A as percentage of sales), and took on more debt
-  More narcissistic CEOs also tended to do more acquisitions and pay much higher premiums for the companies they bought
- More narcissistic CEOs led companies that had more extreme performance results — sometimes they’d do well and other times they’d do terribly
- They also found more narcissistic CEOs were linked to big performance fluctuations for the companies — for a few years they would do really well but this would usually be followed by several years where they did very poorly
One of the conclusions from the authors is:
[I]t is instructive to juxtapose our study with observations made by Jim Collins in his widely-noted book Good To Great (2001).  Collins concluded that one of the distinguishing characteristics of good-to-great companies, or those that showed sustained performance improvements over a 15-year period, was that they were headed predominantly by 41“humble CEOs.”  He said, “those who worked with or wrote about the good-to-great leaderscontinually used words like quiet, humble, modest, reserved, shy, gracious, mild-mannered, self-effacing, understated, did not believe his own clippings, and so on” (page 27).  Collins did not go so far as to equate “humble” with “non-narcissistic,” but such a link can readily be drawn.  Granted, Collins’ sample was small and limited because it was selected on the dependent variable (sustained performance); but his conclusion seems to point to the benefits of nonnarcissistic CEOs.  It is worth noting, however, that Collins’ good-to-great companies were primarily in relatively stable industries, such as paper, steel, and retailing.  [Someone] might argue that Collins’ “humble CEOs” would not have fared as well in more dynamic settings.
In their newest study of the topic, the authors go a step further to see how narcissistic CEOs react to their successes and stumbles.
They found that:
- Highly narcissistic CEOs are much less responsive to recent objective measures of their performance than less narcissistic CEOs.  They found the narcissists would continue to make lots of acquisitions as high premiums, even when their company hadn’t been doing well, whereas the less narcissistic CEOs would get more conservative in the face of bad recent results.
- Most interesting though, they found that highly narcissistic CEOs were very responsive to social praise (measured as media praise and media awards) and this would spur them on to increase their pace of acquisitions and premiums paid (which, over time, tended to destroy shareholder value). Less narcissistic CEOs were much less responsive to social praise. In other words, that praise didn’t cause them to feel confident enough to go out on a buying spree for companies.
When Don’s first article on this topic came out, it immediately sparked a lot of negative press. Blogger Leslie Gaines-Ross called the study pure “CEO bashing.”  PR exec Richard Edelman chided the professors for not understanding how CEOs operate.  He disagreed with an FT editor who encouraged CEOs to be more bashful.
Specifically, Edelman said:
[I]t is the wrong message to tell CEOs to be more bashful. They should be out in the marketplace selling the company narrative. They should empower customers and employees to speak out. They should be passionate advocates on issues like intellectual property protection, catalyzing public support for their lobbying efforts with government. In a world of “continuous partial attention,” this is what is required of successful leaders.
I can also hear people complaining: “Well, what about Steve Jobs?  He was a narcissist. He was pretty successful.”
Yes, anyone who read Walter Isaacson’s biography knows Steve was somewhat narcissistic, although this had tempered significantly by the time he returned to Apple (AAPL) in 1997.  Failing twice – at Apple the first time and then at NeXT – will make you more humble.  But let’s go back to how narcissism was measured in these studies to find a harmful effect.
Steve always liked to do the big product announcements, but he didn’t insist on being in ever press release.  Go back to 2009 – or pick any year – and you’ll see Phil Schiller, Ron Johnson, and Eddy Cue in the press releases.
Also, although Steve had strong opinions and was never shy about sharing them, he didn’t use a lot of “I”s when talking in public.  There were vastly more “we”s when referring to Apple.
Jobs also was able to be persuaded to a view that was totally opposed to his after thinking about it. Most narcissists wouldn’t.
Jobs hired the brightest people he could to surround himself with.  Most narcissists feel threatened by having people around them that are smarter than them (probably for fear they are going to be “discovered” for what they are).
Narcissistic CEOs also tend not to plan for their succession.  Although many criticized Jobs before he died that he didn’t have a succession plan, it turns out that he had a very detailed one — he just didn’t publicize it.  I wonder why there’s been no public questioning of where John Chambers’ succession plan is.  I think Chambers at Cisco (CSCO) would score far higher on the narcissism scale than Jobs.
The other criticism of the professors’ research is people – like Edelman – who say, “are you saying all CEOs should be shrinking violets?”  That is not the case.
Optimism is healthy. Arrogance is not.
Self-confidence is healthy. Megalomania is not.
Believing that you can do a great job as CEO is healthy. Thinking that you know better than others is not.
You need confidence and conviction to succeed as a CEO or in life, but what these studies clearly show is that – taken to extremes – narcissism kills companies and kills CEO careers.
I can understand why many CEOs go too far in their self-confidence.   Throughout their whole careers, they’ve been rewarded for taking risks and showing self-confidence.  It’s like they keep betting on red and winning 11 times in a row.  What are you going to do on the 12th time? Bet red and be more confident than ever.  But it’s the CEOs who can keep their heads and a sense of perspective who – in the long-run and over thousands of cases and not just one or two special cases — tend to be most successful.
In short, keep your feet on the ground while you keep reaching for the stars.
[Jackson was long AAPL at the time of writing]

http://www.forbes.com/sites/ericjackson/2012/01/11/why-narcissistic-ceos-kill-their-companies/

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