At least there is one upside to narcissistic CEOs

I have written about narcissistic CEOs before and how they are bad for a company. For example, narcissistic CEOs engage in more high-profile deals and in the process destroy a lot of shareholder value. We know more generally that CEOs who display the dark triad of psychopathy, narcissism, and Machiavellianism have worse corporate performance and hedge fund managers that display the dark triad underperform other fund managers.

In general, you want to avoid narcissistic CEOs and the traditional way to identify these people in academic research is to examine the way they communicate (e.g. by checking how much they use ‘I’ instead of ‘we’ or how they blame others for failures and credit success to themselves).

David Larcker and his colleagues from Stanford have tried another way to identify narcissistic CEOs, namely, to ask the directors of companies who have worked with CEOs for years to assess their personalities. I find that methodology a bit worrisome because most directors are former or current senior executives themselves. It’s as if you have a jury of convicts decide if the defendant is guilty. Our prisons would be quite empty if we did that.

Rather unsurprisingly, in the eyes of company directors, a lower share of CEOs exhibits narcissistic personality disorder than what has been found in other studies. Instead of the typical 3% to 5%, directors only classify about 2% of CEOs in the group of most narcissistic people. And on a ten-point scale that means these CEOs get a rating of 6 to 7. On average, directors give CEOs an average rating of 2 out of 10 on the narcissism scale. As I said, empty prisons…

But even if Larcker and his colleagues probably have a systematic optimism bias in their personality evaluations the ranking of CEOs may still convey important information. And indeed, the study finds that more narcissistic CEOs have worse performance.

But there is one area where narcissistic CEOs outperform their less narcissistic peers: ESG. On average, companies run by narcissistic CEOs have better ESG ratings than companies run by their less narcissistic peers. I agree with the researchers that his likely reflects a narcissistic CEO’s drive to show the world how great they are. Just like engaging in larger, more high-profile M&A activity, investing in environmental and social projects is likely to attract attention and praise in the media and from investors. Always looking for that praise, narcissistic CEOs do more of what gets them that attention, so they are naturally drawn to do more in the field of ESG.

Interestingly, companies run by narcissistic CEOs also tend to have better governance, which is hard to explain. While narcissistic CEOs are more likely to run companies with dual share structures, they are also more likely to allow changes to a company’s charter or bylaws without a supermajority and are less likely to have a classified board. One can speculate that this is because narcissistic CEOs think they are better able to convince their shareholders and directors that their way is the right way. But it could also be that this is a case of correlation, not causation or that causation goes the other way, namely that companies with better shareholder protection and governance are better able to hire and control a narcissistic CEO. Whatever the reason, the one upside to narcissistic CEOs is that they are good for the E, S, and G of a company.