Value-Destroying Villains: Narcissistic CEOs

Arijit Chatterjee and Don Hambrick, professors of management at Penn State, have finally quantified the effects of narcissistic CEOs. The results aren't pretty.

Working together on a rigorous academic study (PDF file, Adobe Acrobat required), Chatterjee and Hambrick reached a conclusion that leaves little room for question: Narcissistic CEOs are value destroyers.

Measuring narcissism
Of course, you can't just walk into any CEO's office and ask them how narcissistic they are, so Hambrick and Chatterjee got clever.

They decided to take a look at things like the size of the CEO's picture in the annual report, the number of times a CEO was mentioned in a press release, how often the CEO uses the first-person singular in public comments, and the gap between the CEO's pay and the second-highest paid employee.

The results
Studying technology CEOs between the time period of 1992 and 2004, the researchers reached a few crucial conclusions. First off, narcissistic CEOs spent more money than average -- whether on research and development, advertising, or administrative costs.

Furthermore, the performance of companies with narcissistic CEOs was wildly variant over time. After a few years of besting analyst expectations, these companies usually swung to the downside in quick fashion. And if you think about it, that makes sense. If a CEO has an inflated sense of self, then besting expectations -- and being patted on the back for it -- is incredibly important. But you can only finagle the numbers for so long to meet expectations, and eventually the chickens come home to roost.

But the result that stood out the most to me was this: Narcissistic CEOs tended to make more acquisitions at higher valuations than their not-so-narcissistic counterparts. Nothing can kill shareholder value quicker than using cash on hand (or going into debt) in order to purchase a company that -- 10 years down the road -- won't add an ounce of shareholder value.

Real-life proof
Perhaps no technology companies better illuminate the perils of growth-by-acquisition than Microsoft (Nasdaq: MSFT  ) and Hewlett-Packard (NYSE: HPQ  ) .

Let's tackle Microsoft and CEO Steve Ballmer first. Want to know how the company has been spending its cash since he took the helm? Take a look at the numbers.

Year

Company Acquired

Cost

Result

2007 aQuantive $6.6 billion Decision to focus on Bing made deal worth far less. Part of aQuantive later sold off for just $530 million.
2008 Greenfield Online $486 million Microsoft is reportedly selling the main asset it bought (the website Ciao) for under $100 million.
2008 Danger $500 million Danger employees were put to work on a phone that was on the market for only two months before being scrapped.
2008 FAST Search & Transfer $1.2 billion Microsoft paid a 42% premium. Someone didn't do the due diligence: 10 months later, FAST's offices were being raided to investigate fraud charges.
2011 Skype $8.5 billion ???

Source: Fool.com.

Not to be outdone, HP has been a hot mess for a while now. They've had a carousel of executives since Mark Hurd's ousting. As Fool Morgan Housel pointed out last year, if HP's share price remained depressed, "the company would repurchase its entire market cap within the next decade."

But instead of doing that, the company cancelled its repurchase program and paid $10 billion in cash to acquire U.K. software company Autonomy. That cash represents a whopping 20% of HP's market cap!

Hubris, hubris everywhere
Forbes contributor Eric Jackson, reflecting on the research, also called out Cisco (Nasdaq: CSCO  ) CEO John Chambers. Noting that narcissistic CEOs tend to do a substandard job of planning for succession, Jackson wondered "why there's been no public questioning of where John Chambers' succession plan is."

But maybe no CEO would provide a more perfect example of narcissism and hubris -- as defined by the research -- than Netflix (Nasdaq: NFLX  ) CEO Reed Hastings. Let's be clear: He deserves a lot of credit for taking the blame for this summer's missteps.

But whether it was through personal entries on this Netflix blog or videos he was filming to explain his decisions, Hastings -- not his company -- was the center of attention.

Steve Jobs, anyone?
If you've read any of Walter Isaacson's biography of Apple's (Nasdaq: AAPL  ) late Steve Jobs, you might think there'd be no question that he'd qualify as a narcissistic CEO who bucked the trend.

But that's not so -- at least as far as narcissism was measured here. Jobs was rarely in conference calls, didn't insist on being in press releases, had a succession plan in mind (even though we weren't aware of it), and most important, he surrounded himself with smart people. "Most narcissists feel threatened by having people around them that are smarter than them," Forbes' Jackson notes.

A foolproof plan
Knowing the kind of damage narcissistic CEOs can do to your portfolio, your safest bet is probably to invest in solid, dividend-paying companies. If cash is being paid out to you, it isn't being used for silly acquisitions, and studies have shown that dividends are probably the most surefire way to build wealth.

The Motley Fool has prepared a special free report highlighting 11 rock-solid dividends for your consideration. Hand-picked by our top analysts, they promise to help usher your portfolio toward a comfortable retirement. Get your copy of the report today, absolutely free!

Fool contributor Brian Stoffel owns shares of Apple and Netflix. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of Microsoft, Apple, and Cisco Systems, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, Cisco Systems, and Netflix, and creating a bull call spread position in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (34)

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  • Report this Comment On January 13, 2012, at 11:52 AM, jpanspac wrote:

    I don't agree that those are good measures of narcissisism. You could just as easily say the CEO is taking responsibility for his decisions.

  • Report this Comment On January 13, 2012, at 5:16 PM, xetn wrote:

    I would rather believe the narcissisism of the government's desire to control everything including regulating the market to death. Everything from the stupid minimum-wage laws to requiring a license to open a business to collecting taxes from your employees and remitting to "uncle" for free. All of these are killers of efficiency, choice and free trade between buyers and sellers.

    This does not even speak to the huge burden of debt from run-away spending, stupid subsidies of some "desired idea of the day".

  • Report this Comment On January 13, 2012, at 5:50 PM, ershler wrote:

    xetn,

    Is there a topic that doesn't deserve a reply about your thoughts on the role of government.

  • Report this Comment On January 13, 2012, at 6:22 PM, sachamay wrote:

    Good points, although I'm still very bullish on Microsoft because of Windows Phone and the upcoming Windows 8. Check out my article if you want to learn why:

    http://www.criticalpoint.co/blog-2

  • Report this Comment On January 14, 2012, at 10:10 AM, BradReeseCom wrote:

    Hi Brian,

    Does having your initials on your own personal $50 million private jet count as being narcissistic?

    http://www.networkworld.com/community/node/45634

    Especially when Cisco's shareholders get to have the privilege of paying all of the expenses of the jet?

    How about Cisco CEO John Chambers' interview with CRN, would this be considered narcissistic?

    "If you think of Cisco three to five years from now, we have the opportunity, along with our partners, to be the most influential company in the world, not just on communications, but also IT."

    http://www.crn.com/news/networking/207000253/the-new-network...

    Sincerely,

    Brad Reese

  • Report this Comment On January 14, 2012, at 12:27 PM, TMFCheesehead wrote:

    @Brad-

    The second point I wouldn't be too worried about, but the first one would definitely qualify.

    Brian Stoffel

  • Report this Comment On January 15, 2012, at 11:51 AM, tommy2kjr wrote:

    You talk about HP in an article about narcissistic CEOs but you talk about those AFTER Mark Hurd. Well your website lives up to its name, fool.com because Mark Hurd IS the most narcissistic CEO in HP's history, and you talk about acquisitions, HP had very little organic growth under Mark Hurd, yet grew from $85B to $130B in his 5 year tenure.

  • Report this Comment On January 15, 2012, at 12:06 PM, TMFCheesehead wrote:

    @tommy2kjr-

    Those are all fair points. I decided to focus on acquisitions with HPQ because the buyback/Autonomy decision fit nicely into the argument. I could just as well have focused on Hurd.

    Brian Stoffel

  • Report this Comment On January 17, 2012, at 11:33 AM, TMFLomax wrote:

    Brian, I really enjoyed your article. I have also looked at the idea that the modern CEO may have a great deal of narcissism going on, which endangers companies' futures and shareholder value:

    http://www.fool.com/investing/general/2011/07/20/narcissism-...

    I think topics like these are very important for investors to think about, and I'm glad some researchers are looking to quantify these negative traits in people in leadership roles, and how damaging that can be.

    Best,

    Alyce

  • Report this Comment On January 17, 2012, at 11:46 AM, brewersfan81 wrote:

    @TMFLomax-

    Thanks Alyce, and I enjoyed your take!

    Brian

  • Report this Comment On January 21, 2012, at 1:27 AM, nejdro wrote:

    Home Depot's late CEO Bob Nardelli could have been the poster child for their thesis! The Jack Welch wannabe drove HD into the ground while using it as a cash cow while going on a buying spree.

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