Psycho bosses are bad for business

It should be quite obvious to state that, but if you look around amongst finance professionals and top-level executives, you can find an extraordinary number of psychopaths. And when I say psychopath, I don’t mean your casual asocial or unlikeable person, I am talking about clinical levels of psychopathy. One study looked at a representative sample of the British population and assessed them with a standardised clinical test. On average, about 0.6% of the British population met the threshold for psychopathy. Levels of below 1% have been observed around the world. Of course, if you look at the people in prisons or in mental institutions, the prevalence of psychopaths is much higher. In prisons, it is typically around 10% to 15%. 

Unfortunately, functional psychopaths are often attracted to the business world, where they can compete with others in their business for promotions and influence. Amongst business students, psychopathic traits are more prevalent than amongst psychology students, for example. Another study found that amongst 203 individuals who were selected by their employers for a management development programme, the prevalence of psychopaths was 4%. A survey of Australian white-collar workers showed that c. 5% of workers were suffering from bullying from a psychopathic boss.

Today, we know that the influence of psychopathic leaders and co-workers on a business is significant. A new study by researchers from the University of Leicester showed that companies with psychopathic leadership have significantly worse stock price performance than companies with a “normal” leadership. Of course, they didn’t perform a clinical psychopathy test on C-level executives to figure that out. All that was needed was a 280 Dollar software to analyse the annual reports. In other words, you could do it, too.

What the researchers did was to use the word choice in annual reports (excluding the financial statements and footnotes) and examine the use of self-referencing words like “I”, “myself”, or “mine” and checked the prevalence of these words compared to the average prevalence in corporate reports. Psychopaths use such words more frequently than the average person. Similarly, psychopaths use words that refer to others (e.g. “they”, “them”, “he”, or “she”) less frequently. Their language pattern is also more aggressive, using words like “attack”, “conquer”, or “demolish” more frequently. And, of course, psychopaths tend to deflect guilt on others. They are never at fault. So, they tend to use words like “undependable”, “terrible” or “stupid” more often.

Measuring the prevalence of these four clusters of words in the front sections of annual reports (where the leadership of a company tries to create a narrative around the results) showed that a one standard deviation increase in psychopathic language led to a c1.5 percentage point drop in share price returns in the year after the annual report was published. Companies that were run by psychopaths had lower morale, less cohesion amongst the team, and suffered more bullying. 

There are several lessons I learn from these results:

• As a young analyst, I was trained to largely ignore the front section of a company report, because the real information is in the financial statements and the footnotes. Turns out that there is significant information in the front sections as well.

• As an investor, it takes a small investment in software to discover a substantial source of risk for your investments that is not priced in the market.

• As an employee, I prefer to work in an environment with as few psychopaths as possible, where I get along with my colleagues and my bosses. That is worth a lot and in the long run means that I and my business will do better. Life is too short to deal with psychopaths, so don’t do it.