A narcissist signs a report

Nobody likes narcissists but they are fascinating people to study. In their extremes, they show us ‘normal’ people what pitfalls to avoid when pursuing our chosen careers. Investors, meanwhile, can potentially avoid losses by being able to identify narcissists.

But how do you identify a narcissist? You can’t really ask them to undergo a psychological assessment and send you the results. Famously, there is one question that is remarkably reliable in identifying narcissists:

To what extent do you agree with this statement: “I am a narcissist.” (Note: The word “narcissist” means egotistical, self-focused, and vain.)  

It turns out narcissists have no problem telling other people they are narcissists. They think they are absolutely justified in being self-focused and vain.

But if you ask the CEO of a company if they are a narcissist, chances are that their media training interferes with the answer, and they will deny being a narcissist. So that is unlikely to work either. What does work, however, is to look at the financial reports of a company and check the signature of the CEO or Chair of a company. Narcissists have larger signatures that take up more space on a document than non-narcissistic people. John Hancock’s signature on the US Declaration of Independence is so large and flamboyant that his name is now a synonym for signature.

In 2017, Charles Ham and his colleagues examined the performance of US-listed companies and compared it with the size of the signature of their CEOs. They found that CEOs with larger signatures overinvest and overpay for M&A but not in capital expenditures. They are clearly more interested in the flashy news headlines from major takeovers than running the existing business. Firms run by such narcissistic CEOs experience lower profitability and operating cash flows, yet those narcissistic CEOs enjoy higher salaries and compensation packages than their less narcissistic peers. A selection of the investigated companies and the signatures of their CEOs is shown below in a standardised size, so signatures can be compared.

Signature size and return on assets of US CEOs

Source: Harvard Business Review.

Now a new study found another effect of CEO narcissism. Companies run by narcissistic CEOs with large signatures are more likely to announce share buybacks and larger share buybacks. But they are also more likely to renege on that announcement. They either make no repurchases at all or repurchase a smaller amount than announced, thus literally shafting investors for their money.

Investors really need to be careful with narcissistic CEOs and a simple way to do that is to look at the size of their John Hancock.