Bottom Line: An executive’s character traits are linked to certain patterns in a firm’s investments, strategy decisions, and overall performance, a new study finds.
CEOs have wide-ranging influence over their firms. They are charged with plotting a company’s strategic course, helping set the workplace culture, and attracting new talent to the executive suite. Plenty of research exists on how factors such as CEOs’ management styles, experiences, and industry expertise inform their attitudes and behaviors when they are at the helm, which in turn helps determine a firm’s performance. But very little analysis has been conducted on the relationship between a company’s fortunes and another fundamental aspect of a CEO: personality.
It’s easy to see why the underlying character traits of a CEO, although undoubtedly important, have mostly been ignored. For one thing, how do you measure a person’s disposition? Assessing and codifying dimensions of personality is a costly, time-consuming process, requiring detailed interviews of a large number of hard-to-access top executives. It’s simply too impractical, expensive, and unwieldly for the scope of most researchers.
However, the authors of a new study found a way around this problem and, in doing so, uncovered some significant links between CEOs’ personalities and their companies’ investments, strategic choices, and financial performance. Rather than chasing down face-to-face interviews with busy CEOs, the authors analyzed the language they used during earnings conference calls.
Psychologists have established that the way people speak — including their word choice, tone, and reference points — is highly predictive of their personality and remains stable over time.
The underlying character traits of a CEO, although undoubtedly important, have mostly been ignored.
By scrutinizing the language used on calls, the authors were able to explore the links between CEO personality and firm performance on a large scale. They analyzed more than 72,000 transcripts of the question-and-answer portion of conference calls with investors and analysts that took place from 2001 through early 2013, involving more than 4,700 individual CEOs. The authors focused specifically on the Q&A sections because CEOs presumably speak more freely when fielding questions than when delivering prepared remarks.
In line with previous linguistic research, the authors analyzed the transcripts to isolate 33 different linguistic features that, taken together, indicate what kind of personality someone has. These features include certain keywords or markers that indicate emotion, hesitation, or contemplation on the part of the speaker, as well as self-references and the use of terms or phrases associated with a range of feelings, including positivity, negativity, and certainty.
Next, the authors used each CEO’s linguistic evaluation to categorize him or her into one of the so-called big five personality traits. The big five framework, (pdf) which became a cornerstone of psychological research during the early 1990s, suggests that people primarily display one of five personality traits: agreeableness, conscientiousness, extroversion (versus introversion), neuroticism (versus emotional stability), and openness to experience. These essential traits represent the “patterns of thoughts, feelings, and behaviors that reflect the tendency to respond in certain ways in certain circumstances,” as one researcher who studies the framework put it.
And they can give us plenty of insight into how CEOs run their companies, the authors found. For example, CEOs who are characterized by their openness tended to lead R&D-intensive companies. That complements other research that has found open CEOs typically are creative, embrace change, and champion innovation. But apparently, “being open” doesn’t extend to “being open to carrying large amounts of debt.” The authors found that these CEOs ran firms that took risks with R&D projects, but not with their financing choices, and that they resisted taking on large debts in other facets of the company.
Conscientious CEOs, meanwhile, usually oversaw companies with high book-to-market ratios; that is, their accounting and financial health were in line with their company’s stock price. This reflects a conscientious leader’s desire to follow rules and embrace the status quo, and to forgo the risk taking and inventiveness that’s often necessary to promote growth but that can destabilize an established company.
Among the more striking findings: Extroverted CEOs were associated with both negative short- and long-term returns on assets and cash flows. This could be because extroverts like to dominate the decision-making process and seek compliance and agreement from those around them, thus missing out on the benefits of collaboration. Their irrational exuberance may also be a sign of overconfidence, which could be enough to plunge their firms into aggressive tactics or ill-conceived policies that quickly backfire.
Nevertheless, the authors caution that their findings are meant to be descriptive of the larger relationship between CEO personality and company performance, and not necessarily causal. A company won’t suddenly become an R&D juggernaut just because it hires a CEO who is generally open to new ways of thinking. Corporate performance is much more complex than that. Nevertheless, the authors write, “It seems plausible that personality affects the type of firm at which an executive chooses to work, the type of CEO that a firm chooses to hire, [and] the policies that a CEO pursues once he or she is hired.”
At the very least, when pondering what kind of a CEO to appoint, boards of directors may want to look beyond the CV, the degree from the prominent business school, or the reputation forged at another firm. Indeed, they should consider looking deeper, into the core of each candidate’s character. Whether directors want to give prospective CEOs a Myers-Briggs test during the interview, however, is entirely up to them.
Source: “CEO Personality and Firm Policies,” by Ian D. Gow (Harvard University), Steven N. Kaplan (University of Chicago), David F. Larcker (Stanford University), and Anastasia A. Zakolyukina (University of Chicago), Rock Center for Corporate Governance Working Paper No. 220, July 2016