We have previously written about CEO personality attributes as part of our Alternative Investment Data effort at CEORater. The most comprehensive CEO personality analytics piece we have published is our May 2018 “Big 5 Personality Analysis of Mid-Cap Software CEOs“. In this article we cover company-specific risk created by CEO narcissism.
“Narcissism” is not a Big 5 Personality Trait but can be inferred by triangulating multiple variables. CEO Narcissism is a topic that gained traction over a decade ago and since that time numerous research papers have been published on the topic. We link to several of those research papers below. At CEORater we are working to build an alternative data set – including CEO personality attributes & CEO narcissism – that will help investors mitigate company-specific risk.
CEO Narcissism Creates Company-Specific Risk
Narcissist CEOs carry greater legal risk than typical CEOs. CEO narcissism is associated with excess capital allocation, particularly as it relates to R&D expense and acquisitions, but not CapEx. Companies led by narcissistic CEOs experience lower profitability and operating cash flows, yet the CEOs enjoy higher absolute and relative compensation. (Ham, Seybert, & Wang, 2018).
Red flag indicators of CEO narcissism include:
- Executive compensation;
- Size of CEO signature on SEC filings;
- Low reported earnings quality;
- The amount of references to the founder and/or CEO in S-1 filings (see example of former WeWork CEO Adam Neumann).
Former Nissan CEO Carlos Ghosn: Narcissist CEOs are more likely to perpetrate financial crimes. Take for example former Nissan CEO Carlos Ghosn. Mr. Ghosn was arrested in Japan in November 2018 and charged with financial misconduct. Ghosn recently fled Japan where he was slated to stand trial and faced up to 15 years in prison. Ghosn stowed away in a trunk (actual trunk below) to make his escape. At a recent press conference Ghosn blamed Japan’s justice system and former colleagues for his downfall.