Opinion and Investing Column

Kim: Investors must steer clear of the narcissistic CEO

April 13, 2013

KimOne of my favorite classes at the University of Illinois was Classical Civilizations 101, taught by the late, legendary Richard Scanlan. According to a popular classical myth, Narcissus was an exceptionally handsome young man. His rejection of the love of the nymph Echo angered Nemesis, the goddess of revenge, causing her to seek vengeance. As Narcissus paused to drink water from a pond, he was entranced by the beauty of his own reflection. Realizing his love could never be returned, he perished from his sorrow.

Sad story, but what does this have to do with investing? A number of academic studies have concluded narcissistic CEOs make poor choices that can cause the company and your investment to perish.

Top executives, particularly the CEO, decide a company’s choices and strategic direction. These are humans, not robots, and their biases and experiences can have a huge impact on these decisions.

Arijit Chatterjee and Donald C. Hambrick, both from Pennsylvania State University, published a study in 2006 titled, “It’s All about Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance.” They noted four personality characteristics of narcissists:

• Exploitativeness/entitlement (I insist upon getting the respect that is due me),

• Leadership/authority (I like to be the center of attention),

• Superiority/arrogance (I am better than others), and

• Self-absorption/self-admiration (I am preoccupied with how extraordinary and special I am).

Further, the authors wrote, “narcissism is both a cognitive frame and a motivational mechanism, consisting of 1) a belief in one’s superior abilities and 2) an intense, continuous need for affirmation.”

They argue the “inflated self-views and intense need for attention” lead narcissistic CEOs to “favor strategic dynamism and grandiosity, as opposed to strategic incrementalism and stability.” In other words, they like to go for the long ball, which can be great, or disastrous.

This argument seems to make intuitive sense, but determining where on the humble-to-narcissistic continuum a CEO falls is problematic. After all, you can’t very well ask CEOs to fill out a personality questionnaire.

The University of North Carolina business school this year released a study titled, “Narcissism is a Bad Sign: CEO Signature Size, Investment, and Performance.” The authors used the size of the CEO’s signature (adjusting for differing numbers of letters) on annual reports or regulatory filings as a proxy for his/her narcissistic tendencies.

The study found larger CEO signatures related to overinvestment, which destroyed firm value and led to lower current return on assets. Further, “despite the negative relation between CEO narcissism and firm performance, narcissistic CEOs enjoy higher absolute and relative compensation.”

Eric Jackson summed it up nicely in Forbes: “Optimism is healthy. Arrogance is not. Self-confidence is healthy. Megalomania 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.”

If you find your CEO staring mesmerized into a pond, consider running for the exit!•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.

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