In an age of high unemployment, growing corporate profits, and an increasing wealth gap, the suspicion that the rich aren't playing by the rules has only deepened among average Americans. A new study, discussed in Wired, confirms their worries.
In a range of experiments that included real-world and laboratory settings, researchers discovered that wealthier individuals are more likely to behave unethically than average income earners. The scientists found that people who drive more expensive cars cut off pedestrians and other drivers more often, and that the wealthy are less likely to return extra change given by a cashier and will more often lie when given an economic incentive to do so. Paul Piff, a psychologist at UC-Berkeley, explained: "Occupying privileged positions in society has this natural psychological effect of insulating you from others. You're less likely to perceive the impact your behavior has on others. As a result, at least in this paper, you're more likely to break the rules."
For seasoned investors, the experiment's results should come as little surprise. Tales of CEO malfeasance are widespread. In 2008, Merrill Lynch CEO John Thain famously spent over $1 million of his company's money to redecorate his office. While that kind of extravagance may be excusable in fat times, Merrill Lynch was, of course, headed toward collapse. Thain was eliminating thousands of jobs and pulling his firm out of businesses in hopes of surviving. Since then, he has become CEO of the financial firm CIT Group.
What part of "shareholder value" do you not understand?
A recent New York Times article cited scientific research showing that a narcissistic chief can lead to rockier company performance and the pursuit of risky mergers and acquisitions. One study found that the amount of debt on a company's balance sheet correlated with how much its CEO was willing to borrow to purchase a home. The bad behavior tends to be amplified during acquisitions, when the CEOs insist on excessive compensation.
The article goes on to discuss two anecdotes. In the planned buyout of Delphi Financial Group by Tokio Marine Group, Delphi CEO Robert Rosenkranz recently demanded that he be paid over $110 million more than other shareholders. He had also tried to arrange side deals that would put up to $57 million in his pockets, but the board squashed them once it learned about them. Rosenkranz's finagling spurred shareholder lawsuits, and in a legal filing the CEO was described as having a "great sense of entitlement," as well as being "upset, angry, and depressed" during negotiations.
When Kinder Morgan (NYSE: KMI) offered to buy El Paso Corp. (NYSE: EP), the latter's CEO, Douglas Foshee, attempted to negotiate the transaction personally. A Delaware court seemed to believe that Foshee wanted to buy El Paso's exploration and production business with Kinder Morgan retaining its pipeline segment, and it criticized Foshee for his behavior.
These examples should serve as a reminder for investors that management personas weigh heavily on their holdings. While character traits may not be quantifiable in the way that growth rates and dividend payouts are, they should still be monitored.
We could see further evidence of these tendencies in two more examples. Shares in Sears (Nasdaq: SHLD) have been on a tear this year, but same-store sales have declined consistently in recent years, and the company has lost money in its last four quarters, with a $2.4 billion net loss just in its most recent quarter. Chairman Eddie Lampert has taken criticism for his "hedge fund" approach to retail, choosing to spend money on buying back shares, rather than reinvesting in the business. Lampert's mismanagement of the company and his flouting of retail's conventional wisdom have led some to point the narcissist finger at him.
The collapse and $41 billion bankruptcy of MF Global has been well-documented on this site, and former CEO Jon Corzine's penchant for risk-taking seems as big a culprit as any. One colleague described him as "the most competitive person in the world," adding:
He knows there's people out there who don't like him, and he wants to prove them wrong. He's very focused on reputation and how he's perceived. He wants to be perceived as a winner, and he will do what it takes to get there.
The good eggs
While we expect our business leaders to be competitive, there seems to be a point at which the desire for one's own glory supersedes the interests of shareholders. Fortunately, there are other CEOs who have set a better example.
Berkshire Hathaway (NYSE: BRK-B) CEO Warren Buffett is perhaps the best example. One of the richest people in the world, he lives a modest life. Buffett still lives in the Omaha house he purchased in 1958 for $31,500. His belief in value investing extends beyond his occupation to all aspects of his life. The personal frugality is a natural extension of his investing philosophy.
Whole Foods (Nasdaq: WFM) CEO John Mackey is another leader whose deeds back up his words. As a vegan, Mackey espouses the values of his company and its commitment to selling the highest-quality products and promoting environmental stewardship. This mission drives the company, not the bottom line. Mackey has also spoken out against excessive CEO compensation, and the company has instituted its own salary cap for executives based on average worker pay. Mackey's leadership has allowed Whole Foods to establish an iconic brand and reap margins that leave other supermarket chains green with envy.
Foolish takeaway
The lesson for investors, then, seems to be that getting to know your CEO is worth your while. Chief executives whose principles and beliefs guide not only their companies but their lives seem like a good bet. As we saw in the example of John Thain's redecorating while Rome was burning, those heads plagued by greed, selfishness, and narcissism are best avoided.
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